[Federal Register Volume 85, Number 172 (Thursday, September 3, 2020)]
[Rules and Regulations]
[Pages 55082-55155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16337]
[[Page 55081]]
Vol. 85
Thursday,
No. 172
September 3, 2020
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 276
Exemptions From the Proxy Rules for Proxy Voting Advice; Supplement to
Commission Guidance Regarding Proxy Voting Responsibilities of
Investment Advisers; Final Rules
Federal Register / Vol. 85 , No. 172 / Thursday, September 3, 2020 /
Rules and Regulations
[[Page 55082]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-89372; File No. S7-22-19]
RIN 3235-AM50
Exemptions From the Proxy Rules for Proxy Voting Advice
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to its rules governing proxy solicitations so that
investors who use proxy voting advice receive more transparent,
accurate, and complete information on which to make their voting
decisions, without imposing undue costs or delays that could adversely
affect the timely provision of proxy voting advice. The amendments add
conditions to the availability of certain existing exemptions from the
information and filing requirements of the Federal proxy rules that are
commonly used by proxy voting advice businesses. These conditions
require compliance with disclosure and procedural requirements,
including conflicts of interest disclosures by proxy voting advice
businesses and two principles-based requirements. In addition, the
amendments 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 amendments clarify when
the failure to disclose certain information in proxy voting advice may
be considered misleading within the meaning of the antifraud provision
of the proxy rules, depending upon the particular facts and
circumstances.
DATES: Effective date: The rules are effective November 2, 2020.
Compliance dates: See Section II.E.
FOR FURTHER INFORMATION CONTACT: Daniel S. Greenspan, Senior Counsel,
Office of Rulemaking, at (202) 551-3430 or Valian Afshar, Special
Counsel, Office of Mergers and Acquisitions, at (202) 551-3440, in the
Division of Corporation Finance, U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are adopting 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 Final Amendments
A. Codification of the Commission's Interpretation of
``Solicitation'' Under Rule 14a-1(l) and Section 14(a)
1. Proposed Amendments
2. Comments Received
3. Final Amendments
B. Amendments to Rule 14a-2(b): Conflicts of Interest
1. Proposed Amendments
2. Comments Received
3. Final Amendments
C. Amendments to Rule 14a-2(b): Notice of Proxy Voting Advice
and Response
1. Proposed Amendments
2. Comments Received
3. Final Amendments
D. Amendments to Rule 14a-9
1. Proposed Amendments
2. Comments Received
3. Final Amendments
E. Compliance Dates
III. Other Matters
IV. Economic Analysis
A. Introduction
1. Overview of Proxy Voting Advice Businesses' Role in the Proxy
Process
2. Commenter Concerns Regarding the Rule's Economic
Justification
B. Economic Baseline
1. Affected Parties and Current Market Practices
2. Current Regulatory Framework
C. Benefits and Costs
1. Overview of Benefits and Costs and Comments Received
2. Codification of the Commission's Interpretation of
``Solicitation'' Under Rule 14a-1(l) and Section 14(a)
3. Amendments to Rule 14a-2(b)
4. Amendments to Rule 14a-(9)
5. Effect on Smaller Entities
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Use a More Prescriptive Approach in the Final Amendments
2. Require Proxy Voting Advice Businesses To Include Full
Registrant Response in the Businesses' Voting Advice
3. Public Disclosure of Conflicts of Interest
4. Require Additional or Alternative Mandatory Disclosures in
Proxy Voting Advice
5. Require Disabling or Suspension of Pre-Populated and
Automatic Submission of Votes
6. Exempt Smaller Proxy Voting Advice Businesses From the
Additional Conditions to the Exemptions
7. Require a Narrower Scope of Registrant Notice
V. Paperwork Reduction Act
A. Background
B. Summary of Comment Letters to PRA Estimates
C. Burden and Cost Estimates for the Amendments
1. Impact on Affected Parties
2. Aggregate Increase in Burden
3. Increase in Annual Responses
4. Incremental Change in Compliance Burden for Collection of
Information
5. Program Change and Revised Burden Estimates
VI. Final Regulatory Flexibility Analysis
A. Need for, and Objectives of, the Final Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Agency Action To Minimize Effect on Small Entities
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. The applicable laws are
set by the state in which the corporation is incorporated. For various
reasons, including the widely dispersed nature of public share
ownership, most shareholders do not attend these meetings in person.
Rather, most shareholders of publicly traded companies exercise their
right to vote on corporate matters through the use of proxies.\2\
Congress vested in the Commission the broad authority to oversee the
proxy solicitation process when it originally enacted the Securities
Exchange Act of 1934 (the ``Exchange Act'').\3\ As 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
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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 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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In today's financial markets, which are characterized by
significant intermediation and institutional investor participation,\6\
proxy voting advice businesses \7\ have come to play an important role
in the proxy voting process by providing an array of voting services
that can help investment advisers and institutional investor clients
manage their substantive and procedural proxy voting needs.\8\
Investment advisers and institutional investors often retain proxy
voting advice businesses to assist them in making their voting
determinations on behalf of their own clients and to handle other
aspects of the voting process, which for certain investment advisers
has become increasingly complex and demanding over time.\9\ Investment
advisers voting on behalf of clients (including retail investors) and
institutional investors, by virtue of their holdings in many public
companies, including as a result of indexing and other broad portfolio
management strategies, 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.\10\
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\6\ See Amendments to Exemptions from the Proxy Rules for Proxy
Voting Advice, Release No. 34-87457 (Nov. 5, 2019) [84 FR 66518
(Dec. 4, 2019)] (``Proposing Release'') at 66519.
\7\ For purposes of this release, we refer to firms that advise
investment advisers and institutional investors on their voting
determinations, and any person who markets and sells such advice, as
``proxy voting advice businesses.'' 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, and the analysis and research
underlying the voting recommendations that are 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. The reference to ``proxy
voting advice,'' as used in this release, is not intended to
encompass (1) administrative or ministerial services, (2) data or
research that is not used by a proxy voting advice business to
formulate its voting recommendations, or (3) the identity of any of
the proxy voting advice business's clients that receive such advice.
To the extent any data or research underlies a proxy voting advice
business's voting recommendations but is not delivered to its
clients (such as internal work product), such data or research also
would not constitute that business's proxy voting advice. Further,
we recognize that, in formulating its voting recommendations, a
proxy voting advice business may use data and research that was
prepared by another party, such as market intelligence and database
providers. For the avoidance of doubt, the fact that a third party's
data and research is used by the proxy voting advice business would
not, by itself, cause such third party to be a proxy voting advice
business. However, if a proxy voting advice business uses a third
party's data and research in formulating its voting recommendations
and delivers such data and research to its clients, then the data
and research would constitute part of the proxy voting advice
business's proxy voting advice.
\8\ See Proposing Release at 66520, n.17.
\9\ Id. at 66519, n.9.
\10\ Id. at n.8.
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Proxy voting advice businesses typically provide investment
advisers, institutional investors, and other clients with a variety of
services that relate to the substance of voting decisions, such as:
Providing research and analysis regarding the matters subject to a
vote; promulgating their generally applicable benchmark voting policies
(a ``benchmark policy'') or specialty voting policies (a ``specialty
policy''), such as a socially responsible policy, a sustainability
policy, or a Taft-Hartley labor policy,\11\ that their clients can use;
and making specific voting recommendations to their clients on matters
subject to a shareholder vote, either based on the proxy voting advice
business's benchmark or specialty policies or based on custom voting
policies that are proprietary to a proxy voting advice business's
clients (``custom policy'').\12\ This advice is often an important
factor in the clients' proxy voting decisions. Clients may use the
proxy voting advice business's recommendations in a variety of ways,
including as an alternative or supplement to their own internal
resources in analyzing matters when deciding how to vote.\13\
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\11\ For example, the various benchmark and specialty policies
of one proxy voting advice business, Institutional Shareholder
Services (ISS), are set forth on the following web page: https://www.issgovernance.com/policy-gateway/voting-policies/. The various
benchmark and specialty policies of another proxy voting advice
business, Egan-Jones, are set forth on the following web page:
https://www.ejproxy.com/methodologies/.
\12\ See Proposing Release at 66519. As discussed infra Section
II.C.3.c.i., we are excluding from the requirements of new Rule 14a-
2(b)(9)(ii) proxy voting advice to the extent that such advice is
based on custom policies. Custom policies would not include the
proxy voting advice businesses' benchmark or specialty policies,
even if those benchmark or specialty policies were to be adopted by
proxy voting advice businesses' clients. See infra note 394 for a
discussion of how a proxy voting advice business may satisfy the
requirements of new Rule 14a-2(b)(9)(ii) in situations in which a
client's custom policy is identical to the benchmark or specialty
policies.
\13\ Id.
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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\
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\14\ Id.
\15\ Id.
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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.\16\ Because proxies have
become the predominant means by which shareholders of publicly traded
companies exercise their right to vote on corporate matters,\17\ and
institutional investors hold a significant and increasing number of
shares, proxy voting advice businesses have become uniquely situated in
today's market to influence,\18\ and in many cases directly execute,
these investors' voting decisions.\19\
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\16\ Id. at 66520, n.18.
\17\ Id. at 66518, n.2.
\18\ See, e.g., letter from Council of Inst. Investors (Nov. 14,
2019) (``CII I'') (noting that proxy voting advice businesses'
``recommendations and related analysis'' may be ``market-moving'').
\19\ See also infra note 36 for a discussion of the increased
institutional investor holdings in the U.S. markets.
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In recognition of the important and unique role that proxy voting
advice businesses play in the proxy voting process \20\ and in the
voting decisions of investment advisers and institutional investors
\21\ who often vote on behalf of retail investors, the Commission
proposed amendments to the Federal proxy rules in November 2019 to
enhance the transparency, accuracy, and completeness of the information
provided to clients of proxy voting advice businesses in connection
with their voting decisions.\22\
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\20\ Id. at 66520.
\21\ Id.
\22\ See generally Proposing Release.
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Specifically, the Commission proposed amendments to codify its
interpretation that proxy voting advice generally constitutes a
solicitation within the meaning of Exchange Act Section 14(a) and
therefore is subject to the Federal proxy rules. In addition, the
Commission proposed to condition the
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availability of certain existing exemptions from the information and
filing requirements of the Federal proxy rules commonly used by proxy
voting advice businesses upon compliance with additional disclosure and
procedural requirements. Finally, the Commission proposed to amend
Exchange Act Rule 14a-9, the antifraud provision of the Federal proxy
rules, to clarify that, depending upon the particular facts and
circumstances at issue, the failure to disclose certain information in
proxy voting advice may be considered materially misleading within the
meaning of the rule.
We received many comment letters in response to the Proposing
Release.\23\ After considering the public comments, we are adopting the
proposed rules with certain modifications as described, and for the
reasons set forth, below. Consistent with the proposal, we are adhering
to--and adopting an amendment to Rule 14a-1(l) to codify--our
longstanding view that proxy voting advice generally constitutes a
``solicitation'' under Section 14(a).\24\ Absent an applicable
exemption, a person providing such proxy voting advice would be subject
to the Federal proxy rules' information and filing requirements,
including the obligation to file and furnish definitive proxy
statements. For reasons previously stated in the Proposing Release, we
believe that proxy voting advice businesses should be eligible to rely
on an exemption from such information and filing requirements for their
proxy voting advice, but only to the extent that such exemption is
appropriately tailored to their unique role in the proxy process and
facilitates the transparency, accuracy, and completeness of the
information available to those making voting decisions. As such, under
the new rules that we are adopting, persons furnishing proxy voting
advice constituting a solicitation as defined in new 17 CFR 240.14a-
1(l)(1)(iii)(A) (``Rule 14a-1(l)(1)(iii)(A)'') will be eligible to rely
on the exemptions in 17 CFR 240.14a-2(b)(1) (``Rule 14a-2(b)(1)'') and
17 CFR 240.14a-2(b)(3) (``Rule 14a-2(b)(3)'') \25\ only upon
satisfaction of the conditions of new 17 CFR 240.14a-2(b)(9) (``Rule
14a-2(b)(9)'').
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\23\ See generally letters submitted in connection with the
Proposing Release, available at https://www.sec.gov/comments/s7-22-19/s72219.htm. Unless otherwise specified, all references in this
release to comment letters are to those relating to the Proposing
Release. In addition, the SEC's Investment Advisory Committee
adopted recommendations asking the Commission to: prioritize
improvements to the proxy system (end-to-end vote confirmations,
reconciliations, and universal proxies); improve conflict-of-
interest disclosure generally; enhance the discussion about the
value of proxy advisors and shareholder proposals; and expand the
economic cost-benefit analysis. See U.S. Securities & Exchange
Commission Investor Advisory Committee, Recommendation of the SEC
Investor Advisory Committee Relating to SEC Guidance and Rule
Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24,
2020) (``IAC Recommendation''), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/sec-guidance-and-rule-proposals-on-proxy-advisors-and-shareholder-proposals.pdf. These
recommendations were not unanimously approved by the members of the
Investor Advisory Committee; see letters from Stephen Holmes (Jan.
27, 2020) (``S. Holmes''); Paul G. Mahoney and J.W. Verret (Jan. 30,
2020) (``P. Mahoney and J.W. Verret''); Heidi Stam (Jan. 27, 2020).
We address the substance of the IAC Recommendation, together with
related public comments, in the discussion that follows. Finally,
the 2019 Small Business Forum Report included a recommendation that
the Commission provide ``for effective oversight of proxy advisory
firms under Rule 14a-2(b), with a focus on conflicts of interest,
accuracy, transparency, and issuer-specific decision making.'' This
recommendation was tied for first place in the priority ranking
assigned by the participants of the breakout group session. See
Final Report of the 2019 SEC Government-Business Forum on Small
Business Capital Formation (December 2019) (``2019 Small Business
Forum''), available at https://www.sec.gov/files/small-business-forum-report-2019.pdf.
\24\ See infra Section II.A.3.
\25\ Proxy voting advice businesses have typically relied upon
the exemptions in Rule 14a-2(b)(1) and (b)(3) to provide advice
without complying with the filing and information requirements of
the proxy rules. See Proposing Release at 66525 and n.68.
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As described in more detail below, we have modified these
conditions in a number of respects in response to comments received to
provide appropriate flexibility to proxy voting advice businesses to
meet the principles that underlie the objectives of the rule, and to
avoid unnecessary potential disruptions to their ability to provide
their clients with timely voting advice. In addition, consistent with
the amendments to 17 CFR 240.14a-2(b) (``Rule 14a-2(b)''), we are
amending Rule 14a-1(l) to make clarifying changes to the definition of
solicitation as it relates to proxy voting advice and amending Rule
14a-9 to add to the list of examples provided in the Note to that rule.
We are adopting these amendments to Rule 14a-1(l) and Rule 14a-9
substantially in the form proposed, with certain modifications as
described in the discussion that follows.
We recognize that for some shareholders, the services provided by
proxy voting advice businesses can be an important component of the
larger proxy voting process and, as such, help facilitate the
participation of shareholders in corporate governance through the
exercise of their voting rights.\26\ We are also mindful that the
efficacy and effectiveness of the proxy voting system depend on the
ability of shareholders to obtain transparent, accurate, and materially
complete information from an array of relevant parties before making
their proxy voting decisions. To enable shareholders to make informed
voting decisions, Congress and the Commission have placed varying
obligations on participants in the proxy voting process, including
through Commission rulemakings pursuant to the broad authority granted
by Congress to regulate proxy solicitation.\27\
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\26\ See Proposing Release at 66525.
\27\ See infra notes 55-60 and accompanying text for a
discussion of the multifaceted nature of the Federal securities
laws' security holder voting and ownership disclosure regulatory
framework.
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For example, registrants and others who engage in a proxy
solicitation generally must furnish shareholders with a definitive
proxy statement containing numerous specified disclosures.\28\ They
must also generally file all of their additional soliciting materials
with the Commission, which ensures that all shareholders and interested
parties have access to their soliciting statements and have an ability
to consider such statements as part of their voting decisions and, in
certain situations such as in a proxy contest, respond to them.\29\ The
Commission, however, has long recognized that these general
requirements applicable to registrants and others engaged in a proxy
solicitation may not be necessary under certain circumstances and,
throughout the years, has tailored the application of these
requirements as needed. For example, shareholders who beneficially own
more than $5 million of securities and who do not seek proxy voting
authority are exempt from the requirement to file a definitive proxy
statement when they engage in a solicitation, but they still must
publicly file with the Commission any written soliciting materials sent
to security holders and are subject to the antifraud provisions of Rule
14a-9 with respect to the content of those soliciting materials.\30\
Parties conducting certain other solicitation activities, including the
furnishing of proxy voting advice, have relied on other exemptions from
the requirement to file proxy statements.\31\ Still other activity has
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been entirely exempt from the proxy rules, including Rule 14a-9.\32\
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\28\ 17 CFR 240.14a-3; 17 CFR 240.14a-101.
\29\ 17 CFR 240.14a-6(b).
\30\ 17 CFR 240.14a-2(b)(1); 17 CFR 240.14a-6(g).
\31\ 17 CFR 240.14a-2(b). Rules 14a-2(a) and (b) set forth a
number of activities that fall within the definition of a
solicitation but for which the requirement to file a definitive
proxy statement does not apply. This includes, for example, the
delivery of registrants' proxy materials by securities
intermediaries to their clients and the securities intermediaries'
request for voting instructions from their clients (Rule 14a-
1(a)(1)), solicitations by or on behalf of a person who does not
seek proxy authority (Rule 14a-2(b)(1)), solicitations of no more
than ten persons (Rule 14a-2(b)(2)), the furnishing of proxy voting
advice by advisors to their clients under certain circumstances
(Rule 14a-2(b)(3)), the publication or distribution by a broker or a
dealer of research reports under specified conditions (Rule 14a-
2(b)(5)), and the solicitations through electronic shareholder
forums by persons who do not seek proxy voting authority (Rule 14a-
2(b)(6)).
\32\ 17 CFR 240.14a-2(a).
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The Commission has periodically adjusted the proxy rules in
response to market developments, including to provide shareholders with
additional sources of information.\33\ In calibrating the rules and
exemptions, the Commission has generally sought to avoid unnecessary
burdens that may deter the expression of views on matters presented for
a vote while ensuring that shareholders have transparent, accurate, and
materially complete information upon which to make their voting
decisions.\34\ In this regard, the Commission has been guided by the
``fundamental conclusion that the interests of shareholders are best
served by more, and not less, discussion of matters presented for a
vote.'' \35\ This same principle guides us again as we update the
Commission's rules in light of current market practices and
circumstances.
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\33\ For example, the Commission has recalibrated the exemptions
``to provide shareholders with additional sources of information,
opinions and views'' to inform their voting decisions, and to remove
impediments that it determined ``unduly hindered free discussion''
among registrants, shareholders, and other interested parties.
Communications Among Shareholders Adopting Release; see also Concept
Release (``The Commission has actively monitored the proxy process
since the 1930s and has made changes when the process was not
functioning in a manner that adequately protected the interests of
investors.'').
\34\ See Communications Among Shareholders Adopting Release
(noting concerns about ``secret'' solicitations, as well as concerns
about the burden on shareholders).
\35\ Id.
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As explained in the Proposing Release, proxy voting advice
businesses have become an increasingly important and prominent part of
the proxy voting process as institutional investors, who own a majority
of the outstanding shares in today's market,\36\ often retain proxy
voting advice businesses to assist them in making their voting
determinations and voting their shares on behalf of clients. In recent
years, registrants, investors, and others have expressed concerns about
the role of proxy voting advice businesses. These concerns include the
accuracy and soundness of the information, and the transparency of the
methodologies, used to formulate proxy voting advice businesses'
recommendations. Concerns have also focused on potential conflicts of
interest that may affect the recommendations made by the proxy voting
advice businesses.\37\ In addition, questions have been raised about
whether registrants have an adequate opportunity to review and respond
to proxy voting advice before votes, informed by such advice, are cast
and whether shareholders have an adequate opportunity to review the
proxy voting advice, including in the context of any response from the
registrant or others, before casting their votes.\38\ These concerns
and changing market conditions, as discussed above, prompted the
Commission to consider amendments to the exemptions commonly used by
proxy voting advice businesses, which had been crafted 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 institutional investors.\39\ A number of the comment
letters we received in response to the Proposing Release continue to
express these concerns.\40\
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\36\ See, e.g., A. De La Cruz et al., OECD, Owners of the
World's Listed Companies 22 (2019), available at https://www.oecd.org/corporate/Owners-of-the-Worlds-Listed-Companies.pdf
(``In the United States, institutional investors hold around 72% of
the domestic stock market value.'').
\37\ See Proposing Release at 66525.
\38\ See id. at 66529.
\39\ See id. at 66519-21.
\40\ See, e.g., letters from Mark A. Bloomfield, President and
CEO, American Council for Capital Formation (Jan. 27, 2020)
(``ACCF''); Kyle Isakower, Senior Vice Pres. of Reg. & Energy
Policy, American Council for Capital Formation (July 7, 2020)
(``ACCF II''); Cameron Arterton, Vice President, Biotechnology
Innovation Organization (Feb. 3, 2020) (``BIO''); Business
Roundtable (Feb. 3, 2020) (``BRT''); Tom Quaadman, Vice President,
U.S. Chamber of Commerce Center for Capital Markets Competitiveness
(Jan. 31, 2020) (``CCMC''); Henry D. Eickelberg, Chief Operating
Officer, Center on Executive Compensation (Feb. 3, 2020) (``CEC'');
Corporate Governance Coalition for Investor Value (Feb. 3, 2020)
(``CGC''); Neil A. Hanson, Vice President, Investor Relations and
Secretary, Exxon Mobil Corporation (Feb. 3, 2020) (``Exxon Mobil'');
Rick E. Hansen, Assistant General Counsel and Corporate Secretary,
General Motors Company (Feb. 25, 2020) (``GM''); Clifton A. Pemble,
President and CEO, Garmin International, Inc. (Jan. 27, 2020)
(``Garmin''); Brian S. Roman, Global General Counsel (Feb. 3, 2020)
(``Mylan''); Chris Netram, Vice President, Tax & Domestic Economic
Policy, National Association of Manufacturers (Feb. 3, 2020)
(``NAM''); Tony M. Edwards, Senior Executive Vice President, and
Victoria P. Rostow, Senior Vice President & Deputy General Counsel
(Feb. 3, 2020) (``Nareit''); John A. Zecca, Executive Vice
President, Chief Legal and Regulatory Officer, Nasdaq, Inc. (Feb. 3,
2020) (``Nasdaq''); Gary A. LaBranche, President & CEO, National
Investor Relations Institute (Feb. 3, 2020) (``NIRI''); Darla
Stuckey, President and CEO, Society for Corporate Governance (Feb.
3, 2020) (``SCG'') .
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In updating our rules to facilitate better informed proxy voting,
we do not believe that it is necessary to subject proxy voting advice
businesses to the Federal proxy rules' information and filing
requirements applicable to registrants and certain others, such as the
filing and furnishing of definitive proxy statements, as long as they
satisfy certain requirements tailored to their role in the proxy
process. In particular, we believe that concerns raised regarding the
increase in intermediation and complexity in the market and the
increased dependence on proxy voting advice can be addressed, and the
goal of ensuring that shareholders receive more transparent, accurate,
and complete information can be furthered, without the full set of
disclosures that would be required with a definitive proxy statement.
We also recognize that a requirement to publicly file proxy voting
advice with the Commission and disseminate proxy materials to the
shareholders of every registrant covered by the advice could result in
the addition of significant substantive and procedural changes in the
current operations of proxy voting advice businesses and could
adversely impact their business models. For example, such a requirement
would effectively allow investment advisers, institutional investors,
and other investors who do not subscribe to the services of proxy
voting advice businesses to obtain certain proxy voting advice services
free of charge.
For these reasons, we believe that as a general matter these
businesses should continue to be eligible for the benefits of
conditional, tailored exemptions from the information and filing
requirements of the Federal proxy rules generally applicable to
registrants and others. In light of the significant role proxy voting
advice plays in the voting decisions of institutional investors and
others, however, we also believe that the exemptions need to be
fashioned both to elicit adequate disclosure and to enable proxy voting
advice businesses' clients to have reasonable and timely access to
transparent, accurate, and complete information material to matters
presented for a vote--thereby ensuring that the continued use of the
exemptions facilitates informed voting decisions and does not undermine
the purposes of the Federal proxy rules.
Some commenters argued that the Investment Advisers Act of 1940
(the ``Advisers Act'') is the proper regulatory regime for proxy voting
advice businesses, and that the Advisers Act and an investment
adviser's fiduciary duty already address the stated
[[Page 55086]]
objectives of the proposed rules.\41\ We disagree. The Advisers Act and
Section 14(a) serve distinct, though overlapping, regulatory purposes.
The Advisers Act is a principles-based regulatory framework, at the
center of which is a federal fiduciary duty to clients that is based on
equitable common law principles.\42\ Section 14(a) grants the
Commission broad power to adopt rules to control the conditions under
which proxies may be solicited in order to address a Congressional
concern that the solicitation of proxy voting authority be conducted on
a fair, honest, and informed basis.\43\
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\41\ See, e.g., letter from Gary Retelny, CEO, Institutional
Shareholder Services, Inc. (Jan. 31, 2020) (``ISS'').
\42\ See Commission Interpretation Regarding Standard of Conduct
for Investment Advisers, Release No. IA-5248 at 6 (June 5, 2019), 84
FR 33669, 33670 (July 12, 2019) (``Standard of Conduct for
Investment Advisers''); SEC v. Capital Gains Research Bureau, Inc.,
375 U.S. 180, 194 (1963) (noting that the Advisers Act ``reflects a
congressional recognition `of the delicate fiduciary nature of an
investment advisory relationship,' as well as a congressional intent
to eliminate, or at least to expose, all conflicts of interest which
might incline an investment adviser--consciously or unconsciously--
to render advice which was not disinterested'').
\43\ See Communications Among Shareholders Adopting Release at
48277; Proposing Release at n.3.
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As a preliminary matter, we note that proxy voting advice
businesses differ as to whether they believe they fall within the
definition of an investment adviser under the Advisers Act and should
be registered as investment advisers. The Commission has stated
previously that when proxy voting advice businesses provide certain
services, they meet the definition of investment adviser under the
Advisers Act and thus are subject to regulation under the Act.\44\
Specifically, a person is an ``investment adviser'' if the person, for
compensation, engages in the business of providing advice to others as
to the value of securities, whether to invest in, purchase, or sell
securities, or issues reports or analyses concerning securities.\45\
Proxy voting advice businesses provide analyses of shareholder
proposals, director candidacies, or corporate actions and provide
advice concerning particular votes in a manner designed to assist their
institutional clients to achieve their investment goals with respect to
the voting of securities they hold.\46\ In other words, proxy voting
advice businesses, for compensation, engage in the business of issuing
reports or analyses concerning securities and providing advice to
others as to the value of securities and would therefore meet the
definition of an investment adviser unless an exclusion applies.\47\
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\44\ See Concept Release at 43010.
\45\ Advisers Act Section 202(a)(11) [15 U.S.C. 80b-2(a)(11)].
Sections 202(a)(11)(A) through (G) of the Advisers Act address
exclusions to the definition of the term ``investment adviser.'' [15
U.S.C. 80b-2(a)(11)(A) through (G)].
\46\ See Concept Release at 43010.
\47\ Id.
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One such exclusion from the definition of an investment adviser
under the Advisers Act is the ``publisher's exclusion.'' Specifically,
Section 202(a)(11)(D) of the Advisers Act excludes from the definition
of an investment adviser a ``publisher of any bona fide newspaper, news
magazine or business or financial publication of general and regular
circulation.'' \48\ At least one large proxy voting advice business has
taken the position that if it was deemed to be an investment adviser,
it could rely on the exclusion for publishers contained in Section
202(a)(11)(D) of the Advisers Act.\49\
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\48\ Lowe v. SEC, 472 U.S. 181 (1985). The U.S. Supreme Court
has interpreted the ``publisher's exclusion'' to include
publications that offer impersonal investment advice to the general
public on a regular basis. To qualify for the section 202(a)(11)(D)
exclusion, the publication must be: (1) Of a general and impersonal
nature, in that the advice provided is not adapted to any specific
portfolio or any client's particular needs; (2) ``bona fide'' or
genuine, in that it contains disinterested commentary and analysis
as opposed to promotional material; and (3) of general and regular
circulation, in that it is not timed to specific market activity or
to events affecting, or having the ability to affect, the securities
industry.
\49\ See letter from Katherine Rabin, CEO, Glass Lewis & Co.,
LLC (Nov. 14, 2018), available at https://www.glasslewis.com/wp-content/uploads/2018/11/GL-SEC-Roundtable-Statement-111418.pdf. The
Government Accountability Office in its Report about proxy advisory
firms to the Committee on Banking, Housing, and Urban Affairs of the
U.S. Senate in 2016 also took note of the differences in
registration status of proxy advisory firms. The Report observed
that one large proxy voting advice business is not registered with
the SEC as an investment adviser, while another is, and a third is
registered as a nationally recognized statistical rating
organization. See Report to the Chairman, Subcommittee on Economic
Policy, Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, Corporate Shareholder Meetings, Proxy Advisory Firms' Role
in Voting and Corporate Governance Practices from the U.S.
Government Accountability Office (Nov. 2016), available at https://www.gao.gov/assets/690/681050.pdf.
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Regardless of the applicability of the Advisers Act, however, we
believe the concerns motivating the rules we are adopting are squarely
subject to, and appropriately addressed through, regulation under
Section 14(a).\50\ As we noted in the Proposing Release, proxy voting
advice businesses provide voting advice to clients that exercise voting
authority over a sizable number of shares that are voted annually, and
these businesses are uniquely situated in today's market to influence
investors' voting decisions.\51\ This advice also implicates interests
beyond those of the clients who utilize it when voting. Because these
clients vote shares they hold on behalf of thousands of retail
investors, this advice affects the interests of these underlying
investors. Further, in light of proxy voting advice businesses'
clients' ability to affect the outcome of the vote on a particular
matter through their voting power, the proxy voting advice guiding the
clients' votes potentially affects the interests of all shareholders
\52\ of the registrant, the registrant, and the proxy system in
general.\53\
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\50\ Whether an entity meets the definition of an investment
adviser or is eligible for an exclusion does not impact the analysis
of whether it is engaged in ``solicitation'' for purposes of Section
14(a). Relatedly, the retention of a proxy voting advice business
does not relieve an investment adviser of its obligations under the
Advisers Act to its clients. See Commission Guidance Regarding Proxy
Voting Responsibilities of Investment Advisers, Release No. IA-5325,
pp. 5-6 (Aug. 21, 2019) [84 FR 47420, 42421 (Sept. 10, 2019)]
(``Commission Guidance on Proxy Voting Responsibilities''), Question
No. 2 at 12, 84 FR 47423 (discussing steps that an investment
adviser that has assumed the authority to vote proxies on behalf of
clients could take to demonstrate that it is making voting
determinations in a client's best interest); see also Supplement to
Commission Guidance Regarding Proxy Voting Responsibilities of
Investment Advisers, Release No. IA-5547 (July 22, 2020)
(``Supplemental Proxy Voting Guidance'').
\51\ See Proposing Release at 66520.
\52\ See supra note 18.
\53\ Cf. J. I. Case Co. v. Borak, 377 U.S. 426, 432 (1964)
(``The injury which a stockholder suffers from corporate action
pursuant to a deceptive proxy solicitation ordinarily flows from the
damage done the corporation, rather than from the damage inflicted
directly upon the stockholder. The damage suffered results not from
the deceit practiced on him alone but rather from the deceit
practiced on the stockholders as a group.'').
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In the areas of proxy voting, proxy solicitation, and related
activities, the Advisers Act, Section 14(a), and various other statutes
and Commission rules do not operate independently from each other and
are not mutually exclusive. Rather, depending on the activity and
status of the person involved, more than one statutory provision and
related rules may apply, with the various provisions complementing each
other. For example, Section 13(d) of the Exchange Act and the related
rules \54\ are designed to ensure that market participants are informed
when any shareholder (or group of shareholders) acquires more than five
percent of a class of equity securities registered under Exchange Act
Section 12.\55\ Section 13(d) and the related rules generally require
these holders to disclose publicly their ownership and other
information mandated by the Commission, such as any plans that the
holders may have to change the board of directors or management or to
engage in
[[Page 55087]]
extraordinary transactions (such as mergers or material asset sales),
for so long as the holdings exceed the five percent threshold as well
as any material changes to these disclosures.\56\ These mandated
disclosures, which are provided in Schedule 13D, along with the short-
form Schedule 13G adopted pursuant to Exchange Act Section 13(g),\57\
have proven important to investor protection by providing public notice
of significant accumulations of securities by a person that may affect
the control of the company and, ultimately, the interests of all
security holders in the company, including in the context of proxy
voting.
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\54\ 17 CFR 240.13d-1 through 13d-102 (``Rules 13d-1 through
13d-102'').
\55\ 15 U.S.C. 78m(d).
\56\ 17 CFR 240.13d-101.
\57\ 15 U.S.C. 78m(g).
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Yet, the obligation for a shareholder to file Schedules 13D or 13G
does not obviate the shareholder's obligation to comply with Section
14(a) and the Federal proxy rules to the extent that the shareholder
engages in activities that constitute a proxy solicitation. For
example, a dissident shareholder seeking to solicit proxy authority to
elect its own director nominees to a registrant's board in a contested
election must still file and furnish a definitive proxy statement even
though the dissident shareholder may have previously disclosed in its
Schedule 13D the plan to change the board of directors. This is the
result of Congress establishing these two separate statutory provisions
with different purposes, with Section 13(d) focused on providing notice
about concentration of voting power and the use of that power,
including to change or influence the control of the issuer, and Section
14(a) focused on providing information needed for informed shareholder
voting, and the fact that a shareholder may engage in an activity that
triggers obligations under both provisions.
The two statutory obligations often complement each other. For
example, Exchange Act Rule 13d-1 provides certain shareholders,
including many classes of institutional shareholders, with a tailored,
conditional exemption from the general requirements of Section 13(d) if
the shareholder has acquired the securities ``in the ordinary course of
business and not with the purpose nor with the effect of changing or
influencing the control of the issuer.'' \58\ In various circumstances
where shareholders are voting by proxy, and solicitation activity is
ongoing--for example, the election of directors or the approval of an
extraordinary corporate transaction--the information required to be
disclosed publicly by Section 13(d) may be material to a voting
decision and, accordingly, important to the regulation of the proxy
voting process. Similarly, the Commission--noting that Section 13(d)
already sets forth the circumstances for when public disclosures of
such plans, proposals, or agreements are needed--adopted the Rule 14a-
2(b)(1) exemption despite concerns from some commenters that proxy
filings are needed for disclosure of a shareholder's plans or proposals
regarding the registrant or shareholders' voting agreements on a
particular matter.\59\ At the same time, the exemption is not available
for solicitations by any person who, while not seeking proxy authority,
is nevertheless required to file a Schedule 13D or has disclosed in the
Schedule 13D an intent (or reserved the right) to engage in a change of
control transaction or a contested director election, given the
heightened need for the proxy disclosures from a person contemplating
such transformative transactions or contests.
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\58\ 17 CFR 240.13d-1(b)(1)(i).
\59\ See Communications Among Shareholders Adopting Release at
48278 (``When and under what circumstances a large shareholder, or
group of shareholders acting together, must reveal to the SEC, the
company, other shareholders, and the market its plans and proposals
regarding the company has been addressed by Congress, but not
through the provisions governing proxy solicitations. Section 13(d)
of the Exchange Act, as implemented by the Commission in its
regulations adopted thereunder, sets forth the circumstances when
public disclosure of plans and proposals by significant
shareholders, as well as agreements among shareholders to act
together with respect to voting matters, must be disclosed to the
market.''). See also Release No. 34-39538 (Jan. 12, 1998) [63 FR
2854 (Jan. 16, 1998)] (stating the Commission's views on when a
significant shareholder's proxy soliciting activities and
communications could be viewed as having the purpose or effect of
changing or influencing control of the company and thereby
triggering the obligation to file a Schedule 13D). Under Section
13(d) and Section 13(g), a ``group'' is formed when two or more
persons act together for the purpose of acquiring, holding, voting
or disposing of the securities. Congress created the ``group''
concept to prevent persons who seek to pool their voting or other
interests in the securities of an issuer from evading the Section
13(d) or 13(g) obligations because no one person owns more than five
percent of the securities. Use of a proxy voting advice business by
investors as a vehicle for the purpose of coordinating their voting
decisions regarding an issuer's securities without complying with
the filing obligations of Section 13(d) or 13(g) would raise
compliance concerns under the beneficial ownership reporting
requirements.
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Other statutes that often play an important and complementary role
in furthering all aspects of the Commission's mission in the context of
proxy voting and proxy solicitation include Sections 5, 11, and 12 of
the Securities Act of 1933 (the ``Securities Act''), in particular in
circumstances where the vote being solicited is in connection with a
significant transaction, such as a merger, in which new securities may
be issued to the shareholders who are voting on the transaction. In
such a situation, both the registration and prospectus requirements of
Securities Act Section 5 and the proxy solicitation requirements of
Exchange Act Section 14(a) apply, with public companies often filing a
joint proxy statement/prospectus to fulfill both statutory obligations.
This framework--complementary and overlapping statutes and rules
that are based on principles, facts and circumstances, and each
participant's actions as well as status--applies similarly in other key
areas of the Commission's mandate, including the offer and sale of
securities in both the public and private markets, securities trading,
and the provision of investment advice to retail and institutional
investors. Moreover, this framework is consistent with Congressional
intent as reflected in the enactment of the Securities Act, the
Exchange Act, the Advisers Act, and various other key statutes,
including Section 14(a), and has proven to be an effective and
efficient means to regulate an important, multi-faceted and ever-
evolving aspect of commerce. Accordingly, given the importance of a
properly functioning proxy system to investors and the capital markets,
even if other provisions of the federal securities laws may apply to
certain of their activities, it is appropriate for voting advice
furnished by proxy voting advice businesses to be subject to the rules
under Section 14(a), which are designed specifically to enhance the
transparency and integrity of the proxy voting process, with the
ultimate aim of facilitating informed voting decisions.\60\
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\60\ See Proposing Release at 66520.
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II. Discussion of Final Amendments
A. Codification of the Commission's Interpretation of ``Solicitation''
Under Rule 14a-1(l) and Section 14(a)
Exchange Act Section 14(a) \61\ 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.\62\ The purpose of Section 14(a) is to
prevent ``deceptive or inadequate disclosure'' from being made to
shareholders in a proxy solicitation.\63\
[[Page 55088]]
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.'' \64\
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\61\ 15 U.S.C. 78n(a).
\62\ 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).
\63\ Borak, 377 U.S. at 432; 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.'');
Communications Among Shareholders Adopting Release at 48277.
\64\ 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)).
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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 in the public interest and to protect investors in the
proxy voting process.\65\ 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.\66\ Since then, the Commission has
amended the definition as needed to respond to new and changing market
practices that have raised the concerns underlying Section 14(a).\67\
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\65\ See 15 U.S.C. 78n(a); 78c(b); 78w.
\66\ See Order Execution Obligations, Release No. 34-378 (Sept.
24, 1935) 1935 WL 29270.
\67\ 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, 1938)], 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. See infra notes 141-146 and
accompanying text.
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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.'' \68\ 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.\69\
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\68\ 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.'').
\69\ See generally Communications Among Shareholders Adopting
Release.
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Since 1956, the Commission has recognized that its definition of a
solicitation was broad and applicable regardless of whether persons
communicating with shareholders were seeking proxy authority for
themselves.\70\ In light of 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.'' \71\ 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.\72\ By adopting these tailored exemptions,
the Commission removed certain filing and other requirements that were
considered unnecessary for such solicitations in order to facilitate
shareholder access to more sources of information when voting, though
the antifraud provisions of the proxy rules continued to apply.
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\70\ Id. at 48276 (adopting Exchange Act Rule 14a-2(b)(1)).
\71\ See id.
\72\ 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 definition of a
solicitation for purposes of Section 14(a) may result in proxy voting
advice businesses 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 thus, as a
general matter, the furnishing of proxy voting advice constitutes a
solicitation.\73\ In 2019, the Commission issued an interpretative
release regarding the application of the Federal proxy rules to proxy
voting advice.\74\ As the Commission explained in that release, the
determination of whether a communication is a solicitation for purposes
of Section 14(a) depends upon both the specific nature, content, and
timing of the communication and the circumstances under which the
communication is transmitted.\75\ The Commission noted several factors
that indicate proxy voting advice businesses generally engage in
solicitations when they provide proxy voting advice to their clients,
including:
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\73\ See Concept Release at 43009. See also Proposing Release at
66522; Broker-Dealer Release at 341.
\74\ 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'').
\75\ See Commission Interpretation on Proxy Voting Advice at
47417. See also Proposing Release at 66522; Concept Release 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 voting advice businesses 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 voting advice businesses 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 for which shareholder approval is
sought; and
Proxy voting advice businesses typically provide their
recommendations shortly before a shareholder meeting or authorization
vote,\76\ enhancing the likelihood that their recommendations will
influence their clients' voting determinations.\77\
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\76\ See, e.g., letter from Maria Ghazal, Senior Vice President
and Counsel, Business Roundtable (June 3, 2019) 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; Frank Placenti, Are Proxy Advisors Really A
Problem?, American Council for Capital Formation 3 (Oct. 2018),
available at http://accfcorpgov.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport_FINAL.pdf.
\77\ Commission Interpretation on Proxy Voting Advice at 47418.
See also Proposing Release at 66522.
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The Commission observed that where these or other significant
factors (or a significant subset of these or other factors) are
present,\78\ the proxy voting advice businesses' voting advice
[[Page 55089]]
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.'' \79\ Furthermore,
the Commission explained that such advice generally would be a
solicitation even if the proxy voting advice business is providing
recommendations based on the client's own custom policies, and even if
the client chooses not to follow the advice.\80\ In addition, the fact
that proxy voting advice businesses may provide additional services,
such as consulting services to investment advisers and issuers and
general market commentary, does not diminish their role in the proxy
solicitation process.
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\78\ Such other factors may include the fact that many proxy
voting advice businesses' recommendations are typically distributed
broadly.
\79\ See Commission Interpretation on Proxy Voting Advice at
47418. See also Proposing Release at 66522.
\80\ See Commission Interpretation on Proxy Voting Advice at
47418. See also Proposing Release at 66522.
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1. Proposed Amendments
In the Proposing Release, the Commission proposed to amend 17 CFR
240.14a-1(l)(1)(iii) (``Rule 14a-1(l)(1)(iii)'') to add paragraph (A)
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.\81\
The proposed amendment would codify the long-held Commission view that
the furnishing of proxy voting advice generally constitutes a
solicitation governed by the federal proxy rules.
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\81\ Proposing Release at 66522, 66557.
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In connection with the proposed amendment to Rule 14a-1(l)(1)(iii),
the Commission recognized that the major proxy voting advice businesses
may use more than one voting policy or set of guidelines in formulating
their voting recommendations on a particular matter to be voted 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 various specialty
policies. Under the proposal, the voting recommendations formulated
under the benchmark policy and each of the specialty policies would be
considered to be a separate communication of proxy voting advice under
proposed Rule 14a-1(l)(1)(iii)(A). In addition to voting
recommendations formulated pursuant to a proxy voting advice business's
benchmark and specialty policies, the Commission also proposed to
include voting recommendations formulated pursuant to a proxy voting
advice business's client's own custom policies within the scope of the
term ``solicitation,'' consistent with its prior interpretation.\82\
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\82\ Proposing Release at 66522.
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Lastly, the Commission proposed to amend Rule 14a-1(l)(2), which
currently lists activities and communications that do not constitute a
solicitation, to add paragraph (v) to make clear that the terms
``solicit'' and ``solicitation'' exclude any proxy voting advice
furnished by a person who furnishes such advice only in response to an
unprompted request.\83\ Doing so would codify the Commission's
historical view that such a communication should not be regarded as a
solicitation subject to the proxy rules.\84\
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\83\ Id. at 66523, 66557.
\84\ Commission Interpretation on Proxy Voting Advice at 47419
(``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.'');
1979 Adopting Release at 68766. See also Broker-Dealer Release 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'').
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2. Comments Received
Commenters expressed a mix of views on the Commission's proposed
amendments to the definitions of ``solicit'' and ``solicitation'' in 17
CFR 240.14a-1(l)(1) (``Rule 14a-1(l)(1)''). A number of commenters
supported codifying the Commission's interpretation of those
definitions as proposed.\85\ Some of these commenters described the
proposed amendments as consistent with the Commission's existing
interpretation of the term ``solicitation'' \86\ and noted that the
advice provided by proxy voting advice businesses is the kind of
information that Congress intended Section 14(a) to address.\87\ Two
commenters agreed with the Commission's position that the definition of
``solicitation'' should not be limited to a request to obtain proxy
authority or to obtain shareholder support for a preferred outcome.\88\
Those two commenters also agreed with the Commission's view that each
voting recommendation formulated pursuant to a benchmark policy or a
specialty policy should be considered a separate ``solicitation.'' \89\
Other commenters added that the analysis of what constitutes a
``solicitation'' should not turn on whether the proxy voting advice
business's voting recommendations are based on an investor's custom
policy or the proxy voting advice business's benchmark policy.\90\
Finally, a few commenters that supported the proposed amendments
recommended that the Commission include in the definition of
``solicitation'' any reports and ratings by environmental, social, and
governance ratings firms or environmental and sustainability rating
firms.\91\
---------------------------------------------------------------------------
\85\ See letters from BIO; BRT; CCMC; CEC; CGC; Michael
McCormick, Executive Vice President, General Counsel Secretary,
Ecolab Inc. (Feb. 3, 2020) (``Ecolab''); Exxon Mobil; Dennis E.
Nixon, President, International Bancshares Corporation (Jan. 23,
2020) (``IBC''); NAM; Nareit; Nasdaq; David Dixon, President, and
David L. Dragics, Advocacy Ambassador, NIRI Capital Area Chapter
(Feb. 6, 2020) (``NIRI-Capital''); Phil Gramm (Feb. 3, 2020) (``P.
Gramm''); Niels Holch, Executive Director, Shareholder
Communications Coalition (Feb. 3, 2020) (``SCC I''); SCG;
Stakeholders Empowerment Service (Jan. 31, 2020) (``SES'').
\86\ See letters from BRT; CCMC; NAM; Nasdaq; NIRI-Capital.
\87\ See letters from BRT; CCMC; Exxon Mobil; NAM; Nareit; SCC
I.
\88\ See letters from NAM; SCG.
\89\ See letters from NAM; SCG.
\90\ See letters from Exxon Mobil; NAM; SCG.
\91\ See letters from Exxon Mobil; Garmin; NAM.
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Other commenters opposed codifying the Commission's interpretation
of ``solicit'' and ``solicitation.'' \92\ Some
[[Page 55090]]
commenters asserted that the Commission does not have the authority to
regulate proxy voting advice businesses under Section 14(a) \93\ or
other provisions of the Exchange Act.\94\ Some described the proposal
as inconsistent with the Commission's historical treatment of Section
14(a).\95\ Some commenters added that proxy voting advice differs from
proxy solicitation and should not be treated as such under the proxy
rules.\96\ Specifically, these commenters asserted that proxy
solicitation differs from proxy advice in that proxy solicitors play an
advocacy role on behalf of an interested party, whereas proxy voting
advice businesses are independent third parties, hired by shareholders
to provide objective advice that the recipients are not required to
follow.\97\ One commenter also asserted that the proposal incorrectly
equates proxy voting advice with the right to vote on another's behalf
and in a manner that would benefit a particular party.\98\ Two other
commenters, which were identified as proxy voting advice businesses in
the Proposing Release,\99\ asserted that even if the Commission amends
the definition of ``solicitation'' as proposed, their activities will
not constitute ``solicitations'' under the revised definition because
they vote on behalf of their clients rather than providing them with
research reports and voting recommendations.\100\
---------------------------------------------------------------------------
\92\ See letters from Anat Admati, George G.C. Parker Professor
of Finance and Economics, Stanford Graduate School of Business, et
al. (Jan. 15, 2020) (``62 Professors''); Brandon Rees, Deputy
Director, Corporations at Capital Markets, AFL-CIO (Feb. 3, 2020)
(``AFL-CIO II''); Robert Arnold and Matthew Aquiline, Trustees,
Bricklayers & Trowel Trades International Pension Fund (Jan. 31,
2020) (``Bricklayers''); Marcie Frost, Chief Executive Officer,
CalPERS (Feb. 3, 2020) (``CalPERS''); Aeisha Mastagni, Portfolio
Manager, California State Teachers' Retirement System (Feb. 3, 2020)
(``CalSTRS''); Marcia Moffat, Board Chair, Canadian Coalition for
Good Governance (Feb. 3, 2020) (``Canadian Governance Coalition'');
James Allen, Head, and Matt Orsagh, Senior Director, Capital Markets
Policy, CFA Institute (Feb. 3, 2020) (``CFA Institute I''); Kenneth
A. Bertsch, Executive Director, and Jeffrey P. Mahoney, General
Counsel, Council of Institutional Investors (Jan. 30, 2020) (``CII
IV''); Rob Collins, Council for Investor Rights and Corporate
Accountability (Feb. 3, 2020) (``CIRCA''); Ron Baker, Executive
Director, Colorado Public Employees' Retirement Association (Feb. 3,
2020) (``Colorado Retirement''); Duane Roberts, Director of
Equities, Dana Investment Advisors (Dec. 5, 2019) (``Dana'');
Richard B. Zabel, General Counsel and Chief Legal Officer, Elliott
Management Corporation (Jan. 31, 2020) (``Elliott I''); Hans-
Christoph Hirt, Executive Director and Head, Hermes Equity Ownership
Services Limited (Feb. 3, 2020) (``Hermes''); ISS, Josh Zinner, CEO,
Interfait Center on Corporate Responsibility (Feb. 3, 2020)
(``Interfaith Center II''); Kevin Cameron, Executive Chair, Glass
Lewis (Feb. 3, 2020) (``Glass Lewis II''); Jonathan Grabel, Chief
Investment Officer, LACERA (Feb. 3, 2020) (``LA Retirement''), Sarah
Wilson, CEO, Minerva Analytics (Jan. 2, 2020) (``Minerva I'');
Thomas P. DiNapoli, New York State Comptroller (Feb. 3, 2020) (``New
York Comptroller II''); Karen Carraher, Executive Director, and
Patti Brammer, Corporate Governance Officer, Ohio Public Employees
Retirement System (Feb. 3, 2020) (``Ohio Public Retirement''); PIRC,
on behalf of Local Authority Pension Fund Form (LAPFF) (Feb. 3,
2020) (``PIRC''); Fiona Reynolds, Chief Executive Officer,
Principles for Responsible Investment (Feb. 3, 2020) (``PRI II'');
Konstantinos Sergakis, Professor of Capital Markets Law and
Corporate Governance, University of Glasgow (Dec. 26, 2019) (``Prof.
Sergakis''); Craig M. Rosenberg, President, ProxyVote Plus, LLC
(Feb. 3, 2020) (``ProxyVote II''); Hank Kim, Executive Director &
Counsel, National Conference of Public Employee Retirement Systems
(Feb. 3, 2020) (``Public Retirement Systems''); Maureen O'Brien,
Vice President, Corporate Governance Director, Segal Margo Advisors
(Feb. 3, 2020) (``Segal Marco II''); Andrew E. Oster, CFP, AIF,
President & CCO, Triton Wealth Advisors LLC (Feb. 22, 2020)
(``Triton''); Nell Minow, Vice Chair, ValueEdge (Jan. 31, 2020)
(``ValueEdge I''); Theresa Whitmarsh, Executive Director, Washington
State Investment Board (Jan. 22, 2020) (``Washington State
Investment'').
\93\ See letters from AFL-CIO II; CII IV; Elliott I; Glass Lewis
II; ISS; Richard A. Kirby and Beth-ann Roth, RK Invest Law, PBC
(Feb. 3, 2020) (``RK Invest Law''); ProxyVote II.
\94\ See letter from ISS.
\95\ See letters from CalPERS; CII IV; Elliott I; Glass Lewis
II; ISS; ProxyVote II.
\96\ See letters from Bricklayers; CalPERS; CII IV; CIRCA;
Elliott I; Glass Lewis II; ISS; New York Comptroller II; Segal Marco
II.
\97\ See letters from Bricklayers; CII IV; CIRCA; Glass Lewis
II; ISS; New York Comptroller II; Segal Marco II.
\98\ See letter from CalPERS.
\99\ See Proposing Release at 66542, n.190.
\100\ See letters from ProxyVote II; Segal Marco II. Similarly,
another commenter noted that it executes votes directly on behalf
of--but does not provide voting recommendations to--its clients. See
letter from Mary Beth Gallagher, Executive Director, Investor
Advocates for Social Justice (Feb. 3, 2020) (``IASJ''). See also
letters from Sean P. Bannon, Chief Financial Officer, Felician
Sisters of North America (Feb. 3, 2020) (``Felician Sisters II'');
Toni Palamar, Province Business Administrator, Sisters of the Good
Shepherd (Feb. 3, 2020) (``Good Shepherd''); Interfaith Center II;
Patricia A. Daly, Corporate Responsibility Representative, Sisters
of St. Dominic of Caldwell (Feb. 3, 2020) (``St. Dominic of
Caldwell'').
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In addition, some commenters stated that the proposed codification
of ``solicitation'' would increase proxy voting advice businesses'
costs \101\ or interfere with their ability to provide services to
their clients.\102\ Specifically, these commenters asserted that the
proposed amendments would increase litigation risks facing proxy voting
advice businesses \103\ and interfere with the relationship between
investors and proxy voting advice businesses in a way that would
increase costs and complexity and bias voting recommendations in favor
of corporate management.\104\ Two commenters further expressed concern
that treating proxy advice as a solicitation could have a chilling
effect on shareholder communication.\105\
---------------------------------------------------------------------------
\101\ See letters from 62 Professors; CalSTRS; Elliott I;
Interfaith Center II; New York Comptroller II; Public Retirement
Systems; Washington State Investment.
\102\ See letters from CalSTRS; CIRCA; Elliott I; Interfaith
Center II; New York Comptroller II; Ohio Public Retirement; Prof.
Sergakis; Public Retirement Systems.
\103\ See letters from CIRCA; Elliott I; New York Comptroller
II; Ohio Public Retirement; PRI II.
\104\ See letters from New York Comptroller II; PRI II.
\105\ See letters from CalPERS; Washington State Investment.
---------------------------------------------------------------------------
Some commenters asserted that the Commission has not provided
reliable evidence that existing communications between proxy voting
advice businesses and their institutional investor clients present a
significant risk to investor protection to justify the proposed
amendment.\106\ Several commenters expressed concern that the
Commission disregarded the findings and views of its 2018 Roundtable on
the Proxy Process, the Office of Investor Advocate, and the Investor
Advisory Committee and called into question the legitimacy of other
comment letters.\107\ One commenter requested that the Commission
clarify the benefits of treating proxy advice as a solicitation.\108\
Two commenters also expressed concern that the proposal would overlap
with regulations that proxy voting advice businesses are already
subject to, including as ``investment advisers'' under the Advisers Act
and as fiduciaries under the Employee Retirement Income Security Act of
1974.\109\
---------------------------------------------------------------------------
\106\ See letters from CII IV; Elliott I.
\107\ See letters from CII IV; Elliott I; Glass Lewis II; ISS.
\108\ See letter from CalPERS.
\109\ See letters from ISS; ProxyVote II.
---------------------------------------------------------------------------
Finally, some commenters that generally opposed the proposal
recommended that, if the Commission ultimately decides to amend Rule
14a-1(l), it should make the following revisions to narrow the scope of
the proposals: \110\
---------------------------------------------------------------------------
\110\ See letters from CII IV; ISS; New York Comptroller II; PRI
II; ProxyVote II; Segal Marco II.
---------------------------------------------------------------------------
Clarify whether ``proxy voting advice'' under Rule 14a-
1(l)(1)(iii)(A) would include data and research that may inform a proxy
analysis or be described in a proxy research report but that is
marketed separately to investors; \111\
---------------------------------------------------------------------------
\111\ See letter from ISS. The commenter further opined that the
inclusion of such data and research in the scope of ``proxy voting
advice'' would be ``highly inappropriate.'' Id.
---------------------------------------------------------------------------
Exclude advice based on investors' custom policies from
the definition of ``solicitation''; \112\
---------------------------------------------------------------------------
\112\ See letters from ISS; New York Comptroller II; Matthew
DiGuiseppe, Head of Asset Stewardship, Americas, and Benjamin
Colton, Head of Asset Stewardship, Asia Pacific, State Street Global
Advisors (Feb. 3, 2020) (``State Street'').
---------------------------------------------------------------------------
Modify the proposal to recognize the difference between
proxy voting advice businesses and proxy voting agent businesses, the
latter of which ``vote solely on behalf of clients, in accordance with
such clients' preset voting guidelines, based upon third-party
research'' and should not be subject to regulation as a proxy voting
advice business; \113\ and
---------------------------------------------------------------------------
\113\ See letter from Segal Marco II.
---------------------------------------------------------------------------
Clarify that the reference to ``other forms of investment
advice'' in Proposed Rule 14a-1(l)(1)(iii)(A) is not intended to
exclude only advice from an ``investment adviser'' and thereby sweep
into the scope of the term ``solicitation'' communications made in the
normal course of business by other professionals (e.g., management-
consulting firms, lawyers, accountants, broker-dealers, etc.).\114\
---------------------------------------------------------------------------
\114\ See letter from Hermes.
---------------------------------------------------------------------------
With respect to the proposed amendment to Rule 14a-1(l)(2), some
commenters supported the proposal to exclude from the definition of a
``solicitation'' any proxy voting advice furnished by a person only in
response to an unprompted request.\115\ Another
[[Page 55091]]
commenter, however, opposed the proposal, asserting that it would be
unworkable because investment advisers and broker-dealers may be
hesitant to announce a willingness to provide voting advice out of
concern that the Commission would determine they had ``invited and
encouraged'' their clients to ask for advice.\116\ This commenter added
that the proposed amendment would be counterproductive to investor
protection goals because the Commission would be regulating experts
with proxy advice-related skills and resources (i.e., proxy voting
advice businesses), but would not regulate parties with no relevant
expertise who engage in the same activities (i.e., any person that
furnishes proxy voting advice in response to an unprompted
request).\117\ Finally, one commenter recommended that the Commission
narrow the proposed exclusion to cover only proxy voting advice
provided pursuant to an unprompted request ``and not for
compensation.'' \118\
---------------------------------------------------------------------------
\115\ See letters from Andrew Cave, Head of Governance and
Sustainability, Baillie Gifford & Co (Feb. 3, 2020) (``Baillie
Gifford''); BRT; CCMC; Exxon Mobil; IBC.
\116\ See letter from ISS.
\117\ Id.
\118\ See letter from Exxon Mobil.
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3. Final Amendments
We are adopting the amendments to Rule 14a-1(l)(1)(iii) and 17 CFR
240.14a-1(l)(2) (``Rule 14a-1(l)(2)'') as proposed, with some minor
changes to the proposed amendment to Rule 14a-1(l)(1)(iii).
With respect to Rule 14a-1(l)(1)(iii), consistent with the
Proposing Release, we are adding paragraph (A) \119\ to make clear that
the terms ``solicit'' and ``solicitation'' include any proxy voting
advice \120\ 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.
---------------------------------------------------------------------------
\119\ The 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).
\120\ As noted above, one commenter requested clarification as
to whether the term ``proxy voting advice'' would include data and
research that may inform a proxy analysis or be described in a proxy
research report but that is marketed separately to investors. See
supra note 111 and accompanying text. We have clarified the scope of
that term. Compare supra note 7, with Proposing Release at 66519 &
n.11.
---------------------------------------------------------------------------
As noted above, the determination of whether a communication is a
solicitation ultimately depends on the specific nature, content, and
timing of the communication and the circumstances under which the
communication is transmitted.\121\ A number of factors illuminate that
determination, and, as set forth above, application of those factors
indicate that the advice that proxy voting advice businesses provide to
their clients generally constitutes a ``solicitation.'' \122\ This
amendment, therefore, codifies the Commission's interpretation that
proxy voting advice generally constitutes a ``solicitation'' under Rule
14a-1(l).\123\ As we noted in the Proposing Release, 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 concerns about inadequate or
materially misleading disclosures that Section 14(a) and the
Commission's proxy rules are intended to address.\124\ We also 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, are 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.\125\
---------------------------------------------------------------------------
\121\ See supra note 75 and accompanying text.
\122\ See supra notes 75-79 and accompanying text; see also
infra note 144.
\123\ As noted above, some commenters expressed concern that the
amendments are not supported by the relevant evidence and that the
Commission may have disregarded the findings and views of more
reliable observers, and called into question the legitimacy of other
comments. See supra notes 106-107 and accompanying text. Very
shortly after learning of the concerns raised about these comment
letters, the Chairman referred the matter to the SEC's Office of
Inspector General to investigate. That investigation is ongoing. We
have now learned that some of the commenters who submitted certain
of the letters appear to have signed declarations provided to
Members of Congress regarding the authenticity of those letters. Our
decision to adopt the amendments to Rule 14a-1(l), is not predicated
upon the input we received with respect to the quality of the
services provided by proxy voting advice businesses or the
independence thereof. Rather, these amendments largely codify the
Commission's longstanding interpretations of the scope of the terms
``solicit'' and ``solicitation,'' which, as discussed below, are
based on an assessment of the text, structure, history, and purpose
of Section 14(a) of the Exchange Act, as well as judicial precedent.
See infra notes 132-156 and accompanying text. Moreover, although
certain members of the Commission may have cited some of the letters
described above during the Commission's open meeting at which the
amendments discussed herein were proposed, neither the Commission's
interpretations of the scope of the terms ``solicit'' and
``solicitation,'' nor our decision to adopt the other amendments
herein, rest on those letters or their validity. Further, as
discussed below, the Commission's interpretations of the scope of
the terms ``solicit'' and ``solicitation'' are longstanding and far
predate the cited comment letters. See infra notes 150-154 and
accompanying text.
\124\ 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 unprompted or prompted
(such as in the case of a client or prospective client that has
asked the adviser for its views on a particular transaction). For
example, a mutual fund board may request that a prospective
subadviser discuss its views on proxy voting, including votes on
particular types of transactions such as mergers or corporate
governance. As noted in the Proposing Release, the amendment is not
intended to include these types of communications as solicitations
for purposes of Section 14(a). In response to certain comments we
received, we also are clarifying the amendment is not intended to
include communications made in the normal course of business by
other professionals to their clients that may relate to proxy
voting. Instead, the amendment is 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
and sell such advice for a fee.
\125\ 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,
including 17 CFR part 275. 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. See supra notes 41-60 and accompanying text for a discussion
of why we believe Section 14(a), together with the Commission's
proxy rules, is an appropriate regulatory regime for such
communications by proxy voting advice businesses, regardless of
whether they are registered under the Advisers Act.
---------------------------------------------------------------------------
In addition, we are aware of at least two proxy voting advice
businesses, ISS and Egan-Jones, that use more than one proprietary
voting policy or set of guidelines--oftentimes, a benchmark policy and
one or more specialty policies--in formulating proxy voting advice as
to 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).\126\ Consistent with the Proposing Release, we view the proxy
voting advice formulated pursuant to each separate policy or set of
guidelines as distinct solicitations under Rule 14a-1(l)(1)(iii)(A).
Similarly, as discussed in more detail below,\127\ proxy voting advice
formulated pursuant to a custom policy constitutes a distinct
solicitation under the final rule as well.
---------------------------------------------------------------------------
\126\ See supra note 11 and accompanying text.
\127\ See infra notes 165-169 and accompanying text.
---------------------------------------------------------------------------
We recognize that some commenters opposed our amendments to Rule
14a-
[[Page 55092]]
1(l)(1). As noted above, some commenters stated that the Commission is
not authorized to regulate proxy voting advice as a ``solicitation''
under the Exchange Act.\128\ One commenter specifically asserted that
the amendments would be contrary to (1) the legislative history of
Section 14(a), (2) the case law that has construed the terms
``solicit'' and ``solicitation'' under Section 14(a) and Rule 14a-1(l),
and (3) the plain meaning of the term ``solicit.'' \129\ According to
some opposing commenters, the scope of Section 14(a) is limited to
soliciting activities by management, other corporate insiders,
dissident shareholders seeking to take control of a company, or parties
otherwise having an interest in the outcome of a shareholder vote.
These commenters asserted, therefore, that as a matter of statutory
interpretation, Section 14(a) cannot extend to communications or
activities by persons who do not have an interest in the outcome of the
matter being voted upon at the shareholder meeting or who do not seek
proxy authority for themselves.\130\ These commenters further assert
that, as a matter of fact, proxy voting advice businesses satisfy both
of these criteria (i.e., no interest in the outcome of a vote and no
request for authority to vote).\131\
---------------------------------------------------------------------------
\128\ See supra notes 93-94 and accompanying text.
\129\ See letter from ISS.
\130\ See, e.g., supra notes 96-97 and accompanying text.
\131\ Id.
---------------------------------------------------------------------------
We reject this narrow interpretation of Section 14(a). The
Commission's longstanding view that a ``solicitation'' includes any
communication reasonably calculated to result in the procurement,
withholding, or revocation of a proxy--and that this encompasses the
furnishing of proxy voting advice--accords with the text, history, and
structure of Section 14(a) of the Exchange Act, as well as judicial
precedent and our own rules.
The structure of Section 14(a) grants the Commission broad
authority. It authorizes the Commission to prescribe rules and
regulations to govern proxy solicitations ``as necessary or appropriate
in the public interest or for the protection of investors,'' and it
makes it unlawful for any person to ``solicit any proxy'' with respect
to any security registered under Section 12 of the Exchange Act in
contravention of such rules and regulations.\132\ Furthermore, rather
than defining what constitutes a proxy solicitation, the Exchange Act
leaves those terms undefined, while at the same time specifically
empowering the Commission to define such terms consistent with the
Act's ``provisions and purposes'' \133\ and, more broadly, to make
rules and regulations, including rules that classify ``transactions,
statements, applications, reports, and other materials.'' \134\
---------------------------------------------------------------------------
\132\ See 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'').
\133\ 15 U.S.C. 78c(b).
\134\ 15 U.S.C. 78w(a)(1).
---------------------------------------------------------------------------
In light of that context, the phrase ``solicit any proxy'' is not
as narrow or mechanical as some commenters have claimed. Citing a
dictionary definition, one commenter suggested that the ordinary
meaning of the term ``solicit'' is ``to endeavor to obtain.'' \135\
Under this definition, what matters is the subjective intent of the
person engaging in the solicitation, and thus no person would be
soliciting a proxy unless they intend to obtain proxy authority. Some
commenters likewise claimed that no person would be soliciting a proxy
unless they intend to obtain a shareholder's support for a preferred
outcome.\136\ However, dictionaries at the time Section 14(a) was
enacted indicate that the term ``solicit'' had other meanings that did
not depend on the interest or subjective intent of the person engaging
in the solicitation. The term ``solicit'' also meant ``[t]o move to
action.'' \137\ Under this definition, what matters is not the
subjective intent to obtain a proxy, but rather the effect on a
recipient's proxy vote. A person solicits a proxy by influencing a
shareholder to act. As between these two meanings, we view the latter
as more consistent with Section 14(a)'s provisions and purposes, as any
inducement that may move a shareholder to vote a proxy in a certain way
implicates the Commission's charge to ensure that necessary and
appropriate regulations are in place for the protection of investors.
That is why the Commission has recognized since 1956 that persons who
do not seek proxy authority themselves nevertheless engage in
solicitation when they communicate with shareholders in a manner
reasonably calculated to ``result'' in a proxy vote.
---------------------------------------------------------------------------
\135\ See letter from ISS.
\136\ See, e.g., supra notes 96-97 and accompanying text. In
arguing that the plain meaning of ``solicit'' supports its view, one
commenter relied on the dictionary definition ``to endeavor to
obtain,'' even though the commenter elsewhere acknowledged that
Section 14(a) has long been understood to encompass communications
that do not seek to obtain a proxy--and thus would not meet that
narrow definition. See letter from ISS.
\137\ See Webster's New International Dictionary (2d ed. 1934)
(providing multiple definitions of the term ``solicit,'' including
``[t]o move to action'' or ``[t]o urge'' or ``insist upon'').
---------------------------------------------------------------------------
The context and history of Section 14(a) accord with this
conclusion. Congress considered different versions of the Exchange Act
that set forth the applicable proxy standards with more specificity in
the analog to Section 14(a) and rejected them in favor of the broad
authority granted to the Commission in Section 14(a), as enacted.\138\
While Congress may have been motivated to enact Section 14(a) in 1934
due to the particular abuses by corporate insiders or dissident
shareholders that occurred during that time, nothing in either the text
or legislative history of Section 14(a) indicates that Congress
intended to limit its scope to solicitations conducted by those
parties. Rather, where Congress intended to exempt certain classes of
market participants, transactions, or activities from the statutory
provisions of the Securities Act and the Exchange Act (as enacted in
1933 and 1934, respectively) or limit the Commission's rulemaking
authority with regard to those market participants, transactions or
activities, it generally did so by expressly including language in the
relevant statutory provision.\139\
[[Page 55093]]
Indeed, Section 14(a) itself excludes any ``exempted security'' from
its scope, but otherwise facially applies to ``any person'' without
carving out any class of market participants.\140\
---------------------------------------------------------------------------
\138\ See Louis Loss et. al., Securities Regulation, Sec. 6.C.2
(6th ed. 2018) (``In Sec. 14(a) of the Exchange Act, Congress,
abandoning the more specific standards of the original bills, left
the solicitation of proxies to the SEC under broad public interest
standards.'') (citing S. 2693, H.R. 7852, 73d Cong., 2d Sess. Sec.
13(a) (1934)).
\139\ See, e.g., Securities Exchange Act of 1934, Public Law 73-
291, 48 Stat. 881, Sec. 3(a)(4) (1934) (``Exchange Act (as enacted
in 1934)'') (stating that the definition of the term ``broker''
``does not include a bank''); Exchange Act (as enacted in 1934)
Sec. 3(a)(5) (stating that the definition of the term ``dealer''
``does not include a bank, or any person insofar as he buys or sells
securities for his own account, either individually or in some
fiduciary capacity, but not as part of a regular business'');
Exchange Act (as enacted in 1934) Sec. 3(a)(10) (defining the term
``security'' but expressly stating that the term ``shall not include
currency or any note, draft, bill of exchange, or banker's
acceptance which has a maturity at the time of issuance of not
exceeding nine months, exclusive of days of grace, or any renewal
thereof the maturity of which is likewise limited''); Exchange Act
(as enacted in 1934) Sec. 15(l) (restricting broker-dealers' over-
the-counter market activity, but expressly exempting from these
restrictions certain exempt securities, commercial paper, and other
instruments); Exchange Act (as enacted in 1934) Sec. 24(a)
(limiting the Commission's authority to require the ``revealing of
trade secrets or processes in any application, report, or document
filed with the Commission under this title''); Securities Act of
1933, Public Law 73-22, 48 Stat. 74, Sec. 2(a)(10) (1933)
(``Securities Act (as enacted in 1933)'') (defining the term
``prospectus'' and expressly excluding certain written
communications from this definition); Securities Act (as enacted in
1933) Sec. 2(a)(11) (carving out from the statutory definition of
``underwriter'' any ``person whose interest is limited to a
commission from an underwriter or dealer not in excess of the usual
and customary distributors' or sellers' commission''); Securities
Act (as enacted in 1933) Sec. 2(a)(3) (carving out from the
statutory definition of the terms ``sale'', ``sell'', ``offer to
sell'', and ``offer for sale'' ``preliminary negotiations or
agreements between an issuer and any underwriter'').
\140\ See 15 U.S.C. 78n(a).
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Nor does the case law construing Section 14(a) mandate that a party
must have an ``interest'' in the outcome of a shareholder vote in order
for a solicitation to occur, as certain commenters contended.\141\
Courts have articulated a broad definition of the term ``solicit'' such
that the proxy rules ``apply not only to direct requests to furnish,
revoke, or withhold proxies, but also to communications which may
indirectly accomplish such a result or constitute a step in the chain
of communications ultimately designed to accomplish such a result.''
\142\ Moreover, relying on the ``subjective intent of the person
furnishing the communication'' to determine whether a particular
communication constitutes a solicitation ``is at odds with the plain
and unambiguous meaning of the regulation.'' \143\ Instead, the phrase
``reasonably calculated to result in the procurement, withholding or
revocation of a proxy'' in Rule 14a-1(l)(1)(iii) requires an objective
inquiry that focuses ``on the manner in which the communicator
attempted to influence a shareholder's proxy decision from the
perspective of the shareholder who received the material.'' \144\
Courts also have broadly understood a ``solicitation'' to encompass
``communications which may indirectly [result in a proxy being
furnished, revoked or withheld],'' \145\ an interpretation that does
not, by its terms, require inquiry into the speakers' interest or
subjective intention. To inject a subjective element into the test of
whether a communication is a ``solicitation'' under Rule 14a-
1(l)(1)(iii) as argued by one commenter (i.e., determining whether the
speaker is ``completely indifferent to the outcome of the matter as to
which shareholder approval was sought'' \146\) runs counter to this
case law.
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\141\ See, e.g., letter from ISS. Although we do not believe
that Section 14(a) requires that a party have an interest in the
outcome of a vote, we also do not accept commenters' assertion that,
as a matter of fact, proxy voting advice businesses necessarily do
not have an interest in the outcome of matters being voted upon at
shareholder meetings or do not seek proxy authority for themselves.
While this may be true in many instances, we do not think this is
always the case. See U.S. Gov't Accountability Office, GAO-17-47,
Report to the Chairman, Subcommittee on Economic Policy, Committee
on Banking, Housing, and Urban Affairs, U.S. Senate, Corporate
Shareholder Meetings: Proxy Advisory Firms' Role in Voting and
Corporate Governance Practices, 18 (2016), available at https://www.gao.gov/assets/690/681050.pdf (``2016 GAO Report'') (``Officials
from one proxy advisory firm with whom we spoke stated that they
agree that proxy advisory firms have influence on corporate
governance practices. . . . They noted that such influence is good
and ultimately they want to have a positive influence on their
clients because they view that as part of their responsibility--to
promote good governance.''); Kevin E. McManus, CEO Compensation was
a Joke Before Covid-19, Now It is Just Obnoxious, Egan-Jones Proxy
Services (June 11, 2020), available at https://www.ejproxy.com/weekly-wreck/36/ceo-compensation-was-joke-covid-19-now-it-just-obnoxious/ (criticizing executive compensation at certain
registrants and making policy-based recommendations to regulate
executive compensation). See also infra Section II.B.1. (noting
examples of circumstances where the interests of a proxy voting
advice business may diverge materially from the interests of the
clients who utilize their advice, including a proxy voting advice
business providing 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 or actively
supported by that client).
\142\ Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d
Cir. 1985) (emphasis added); see also Capital Real Estate Inv'rs Tax
Exempt Fund Ltd. P'ship v. Schwartzberg, 917 F.Supp. 1050, 1059
(S.D.N.Y. 1996).
\143\ Gas Natural Inc. v. Osbourne, 624 Fed. Appx. 944, 950 (6th
Cir. 2015) (unpublished).
\144\ Id. (citing Broker-Dealer Release at 342 (noting that
communications from broker-dealers to shareholders ``may constitute
a solicitation requiring compliance with the proxy rules'' depending
``upon the content of the material, upon the conditions under which
it is transmitted, and upon surrounding circumstances'')). See also
Long Island Lighting Co., 779 F.2d at 796 (``Determination of the
purpose of the communication depends upon the nature of the
communication and the circumstances under which it was
distributed.''); Sargent v. Genesco, Inc., 492 F.2d 750, 767 (5th
Cir. 1974) (``Whether or not a particular communication is a
solicitation within the meaning of 14(a) is a question of fact
dependent upon the nature of the communication and the circumstances
under which it is transmitted.''); Dyer v. SEC, 291 F.2d 774, 777-78
(8th Cir. 1961) (indicating that the determination of whether a
communication constitutes a solicitation depends on the ``nature and
circumstances'' of a communication and whether it can be rationally
inferred that the speaker ``knew or could be expected to foresee
that the things which he said might on their implication and
innuendo affect the action of a stockholder in his granting of proxy
authority,'' regardless of ``whatever [the speaker] may have had in
his mind''); Schwartzberg, 929 F.Supp. at 113-14 (noting that if a
statement ``presents the transaction in a manner objectively likely
to predispose security holders toward or against it . . . it must
comply with the proxy rules''). Among the factors relevant to the
objective inquiry into whether a communication constitutes a
``solicitation'' are (1) ``the contents of the communication,'' (2)
``the conditions under which the communication is distributed,'' and
(3) ``[t]he timing of the communication in relation to the relevant
surrounding circumstances.'' Gas Natural Inc., 624 Fed. Appx. at
950. As described above, the proxy voting advice that proxy voting
advice businesses send their clients generally constitutes
``solicitations'' under each of those three factors. See supra notes
75-79 and accompanying text.
\145\ Long Island Lighting Co., 779 F.2d at 796.
\146\ See letter from ISS.
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Relying on its broad rulemaking authority, the Commission has since
1956 defined a solicitation to include any ``communication to security
holders under circumstances reasonably calculated to result in the
procurement, execution, or revocation of a proxy.'' \147\ This
definition advances Section 14(a)'s overarching purpose of ensuring
that communications to shareholders about their proxy voting decisions
contain materially complete and accurate information.\148\ It would be
inconsistent with that goal if a person 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). The fact that
shareholders may retain providers of proxy voting advice to advance
their own interests does not obviate these concerns.
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\147\ 17 CFR 240.14a-1(l)(1)(iii).
\148\ Borak, 377 U.S. at 432; see also 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
at 48277.
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As described above, some commenters also asserted that the proposed
amendment to Rule 14a-1(l)(1)(iii) conflicts with well-established
practice in the proxy voting advice business industry and the
Commission's historical treatment thereof.\149\ As an initial matter,
and as noted in the Interpretive Release and the Proposing Release, the
amendment to Rule 14a-1(l)(1)(iii) is in accordance with, and
represents a codification of, the Commission's longstanding view that
proxy voting advice generally constitutes a ``solicitation.'' This view
was originally set forth in a 1964 release \150\ and reiterated by the
Commission in 1979 \151\ and 2010.\152\ The cited releases did not
limit the scope of the term ``solicitation'' so as to
[[Page 55094]]
exclude proxy voting advice provided by ``disinterested persons.''
Instead, the Commission articulated its view that proxy voting advice
generally constitutes a ``solicitation,'' without reference to a
particular class of market participants that must be providing such
advice.\153\ Any suggestion otherwise requires reading into the
releases an additional qualification that the Commission did not
articulate.\154\
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\149\ See supra note 95 and accompanying text.
\150\ See Broker-Dealer Release at 341 (``Material distributed
during a period while proxy solicitation is in progress, which
comments upon the issues to be voted on or which suggests how the
stockholder should vote, would constitute soliciting material.'').
\151\ See 1979 Adopting Release at 68766; Shareholder
Communications, Shareholder Participation in the Corporate Electoral
Process and Corporate Governance Generally, Release No. 34-16104
(Aug. 13, 1979) [44 FR 48938 (Aug. 20, 1979)], at 48941 n.25.
\152\ Concept Release at 43009 (``As a general matter, the
furnishing of proxy voting advice constitutes a `solicitation'
subject to the information and filing requirements in the proxy
rules.'').
\153\ Although the Commission's view was originally articulated
in the context of an opinion by its General Counsel regarding
participation by broker-dealer firms in proxy solicitations, nothing
in the language of that release indicates that its position could
not also be extended to other independent, disinterested parties
engaged in the same activity. See Broker-Dealer Release.
\154\ The commenters also cite the 1979 and 1992 releases as
evidence that the Commission intended to narrow the scope of the
term ``solicitation'' so as to avoid including communications by
disinterested fiduciaries. See, e.g., letter from ISS (citing
Communications Among Shareholders Adopting Release; 1979 Adopting
Release). However, those releases reinforced the Commission's view
of the breadth of the term by creating additional exemptions from
the proxy filing rules. See Communications Among Shareholders
Adopting Release at 48278 (creating an exemption from the proxy
filing rules for solicitations by persons not seeking proxy
authority who do not have a substantial interest in the matter
subject to a vote); 1979 Adopting Release at 68766-67 (creating an
exemption from the proxy filing rules for voting advice provided to
persons with whom a financial advisor has a business relationship).
In other words, the Commission recognized that certain classes of
market participants were conducting activities that constituted
``solicitations,'' but sought to grant them relief from the proxy
filing rules by adopting applicable exemptions. Had the Commission
interpreted the term ``solicitation'' as not applying to those
market participants' activities, no such exemption from the proxy
filing rules would have been necessary in the first place. Also, had
the Commission intended to narrow the scope of the term
``solicitation'' to avoid its application to those classes of market
participants, it would have amended the definition thereof in Rule
14a-1(l) appropriately. In fact, in the 1992 release, the Commission
acknowledged that even though it considered (but did not ultimately
adopt) proposed amendments exempting from the proxy filing rules all
communications by ```disinterested' persons who are not seeking
proxy authority,'' such communications under that proposal would
still have constituted ``solicitations'' and ``remained subject to
antifraud standards.'' Communications Among Shareholders Adopting
Release at 48278.
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We further note that these commenters' position is inconsistent
with the treatment of other disinterested parties under the current
proxy regulatory scheme. Shareholders today exercise their voting
rights through an intricate proxy process involving numerous
intermediaries, such as broker-dealers, that each play an important
role. Most shareholders own their securities in ``street name,'' with
their broker-dealers and banks generally holding the securities in
their name on behalf of their customers and possessing the legal
authority to vote those shares. Under the current proxy process and
rules, these broker-dealers and banks must forward a company's proxy
materials to their customers and seek voting instructions (often called
``voting instruction forms'') from the customers on whose behalf they
hold those shares. These activities are currently treated as
solicitations under the proxy rules, with the Commission generally
exempting them from the informational and filing requirements, despite
the fact that the broker-dealers and banks have no interest in the
outcome of the matters being presented for a vote and no involvement in
the preparation of the materials being sent to the customers.\155\
Those who have considered the issue, including at least one court, have
recognized that the forwarding of a company's proxy materials and
requests for voting instructions by broker-dealers constitute a form of
soliciting activity subject to the Commission's rules.\156\
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\155\ See 17 CFR 240.14a-2(a)(1); see also Jill E. Fisch,
Standing Voting Instructions: Empowering the Excluded Retail
Investor, 120 Minn. L. Rev. 11, 40-41 (2017) (noting that broker-
dealers' requests for voting instructions from their customers
``fall[] within the SEC's definition of a proxy solicitation'' and
that Rule 14a-2(a)(1) ``exempts the broker from the filing
requirements and the obligation to furnish a proxy statement'').
\156\ See, e.g., Walsh & Levine v. The Peoria & E. R. Co., 222
F.Supp. 516, 518-19 (S.D.N.Y. 1963) (``[I]f brokers transmit some
but not all proxy solicitations to those for whose benefit they hold
in street name, they are acting in contravention of the Commission
rules if they fail to fulfill the duties required of active proxy
solicitors.''); Broker-Dealer Release at 342 (``[I]t is quite clear
. . . that the transmission to customers of proxy material furnished
by the issuer or any other person who is soliciting a proxy, is
clearly itself the solicitation of a proxy, since the material is
transmitted under circumstances reasonably calculated to result in
the procurement, withholding or revocation of a proxy.''); Fisch,
supra note 155 at 40; Council of Institutional Investors, Client
Directed Voting: Selected Issues and Design Perspectives (August
2010) (``Rule 14a-(l) under the Exchange Act defines solicitation to
include 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,' subject
to certain exceptions. Communications sent by brokers to encourage
participation in a [client directed voting] model would appear to
fall within this definition absent an exemption, and the SEC staff
agrees with this conclusion. As such, brokers would have to comply
with the proxy solicitation rules, including principally the
disclosure and SEC filing requirements applicable to proxy
materials.'').
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In addition, market observers, including proxy voting advice
businesses themselves, have long recognized that the provision of proxy
voting advice may constitute a ``solicitation'' subject to the proxy
rules.\157\ Notably, one proxy voting advice business that now argues
that the Commission lacks authority to regulate proxy voting advice as
a ``solicitation'' submitted a letter to the Division of Corporation
Finance in 1988 requesting no-action relief from the Commission's proxy
filing rules.\158\ The proxy voting advice business did not request
relief on the basis that its proxy voting advice should not be
considered a ``solicitation.'' Instead, the letter appears to
implicitly assume that such advice could be a ``solicitation'' by
requesting relief from the proxy filing rules under the predecessor
exemption to current Rule 14a-2(b)(3) on the basis that its proxy
voting advice was provided to persons with whom it had a business
relationship.\159\ Further, as recently as 2016, the CEO of another
proxy voting advice business testified that ``[p]roxy advisory firms
also are subject to the Securities and Exchange Commission's proxy
solicitation rules under the [Exchange Act].'' \160\ The CEO further
testified that ``proxy voting advisors operating today . . . are
generally deemed by the SEC as qualifying for the exemptions based on
rules 14a-2(b)(1) and 14a-2(b)(3).'' \161\ These statements suggest
that the proxy voting advice business industry has understood for over
30 years that its proxy voting advice constitutes a ``solicitation''
under Rule 14a-1(l), or at least that the Commission may consider their
proxy voting advice to constitute a ``solicitation.''
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\157\ See, e.g., Sagiv Edelman, Proxy Advisory Firms: A Guide
for Regulatory Reform, 62 Emory L.J. 1369, 1378 (2013) (``Due to the
expansive definition of solicitation, proxy advisory firms would be
subject to federal proxy rules if not for the exemption found in
Exchange Act Rule 14a-2(b)(3).''); Douglas G. Smith, A Comparative
Analysis of the Proxy Machinery in Germany, Japan, and the United
States: Implications for the Political Theory of American Corporate
Finance, 58 U. Pitt. L. Rev. 145, 201 n.284 (1996) (``Furnishing of
proxy voting advice by an investment advisor is exempt [from the
proxy filing rules] under certain circumstances.''); John C. Coffee,
Jr., Liquidity Versus Control: The Institutional Investor as
Corporate Monitor, 91 Colum. L. Rev. 1277, 1358 (1991) (``The legal
issue is whether the provision of proxy advice amounts to a proxy
`solicitation' under SEC Rule 14a-1. Clearly, the definition of
solicitation reaches this far . . . .''); Bernard S. Black,
Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520, 530 (1990)
(``Nor are the Proxy Rules limited to communications by the
contestants. A third party who proffers voting advice is
`soliciting' votes.''). See also infra notes 158-161 and
accompanying text.
\158\ Institutional Shareholder Services, Inc., 1991 SEC No-Act.
LEXIS 17 (Dec. 15, 1988).
\159\ See id.
\160\ Katherine H. Rabin, Chief Executive Officer, Glass, Lewis
& Co., Statement to the U.S. House of Representatives Committee on
Financial Services: Markup of H.R. 5983, the ``Financial CHOICE Act
of 2016,'' at 3 (September 13, 2016), available at https://www.glasslewis.com/wp-content/uploads/2016/09/2016_0912_Glass-Lewis-Statement-re-H.R.-5983_final.pdf.
\161\ Id.
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Some commenters also asserted that our amendments to Rule 14a-
1(l)(1)(iii) will increase proxy voting advice businesses' costs or
interfere with their
[[Page 55095]]
ability to provide services to their clients. Specifically, commenters
indicated that the amendments could increase litigation risks for proxy
voting advice businesses or have a chilling effect on shareholder
communications.\162\ Although we acknowledge that compliance with the
new conditions we are adopting to the exemptions in Rules 14a-2(b)(1)
and 14a-2(b)(3) may increase the resources that proxy voting advice
businesses apply to ensuring compliance with applicable law and
regulation,\163\ we disagree that our amendments to Rule 14a-
1(l)(1)(iii), taken in isolation, will have a material impact on the
operation of a proxy voting advice business.\164\ To the contrary, the
fact that both the Commission and the market generally, including proxy
voting advice businesses, have long recognized that proxy voting advice
generally constitutes a ``solicitation'' indicates that any impact from
codifying this aspect of the definition of a solicitation likely is
already reflected in the manner in which proxy voting advice
businesses' provide their services and the pricing thereof.
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\162\ See supra notes 101-105 and accompanying text.
\163\ See infra Section IV.
\164\ To the extent that some proxy voting advice businesses did
not previously understand their proxy voting advice to constitute a
solicitation and thus subject to Rule 14a-9 liability, it is
possible that the codification of the Commission's longstanding view
could have some economic effects. See infra Section IV.B.
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Finally, in the Interpretive Release, we stated our view that proxy
voting advice based on a proxy voting advice business's application of
custom policies generally should be considered a ``solicitation'' under
Rule 14a-1(l).\165\ We continue to hold that view for the reasons
stated in the Interpretive Release. As a result, such proxy voting
advice is subject to Rule 14a-9, and persons who provide such advice in
reliance on the exemptions in either Rule 14a-2(b)(1) or (b)(3) must
comply with the conflicts of interest disclosure requirements set forth
in new 17 CFR 240.14a-2(b)(9)(i) (``Rule 14a-2(b)(9)(i)'').\166\ Some
commenters recommended that we amend Rule 14a-1(l) to exclude from the
definitions of ``solicit'' and ``solicitation'' proxy voting advice
that is based on investors' custom policies.\167\ These commenters'
concerns, however, focused largely on subjecting investors' custom
policies, and the proxy voting advice that is based thereon, to the
proposed review and response mechanism outlined in the Proposing
Release.\168\ As discussed in more detail below, new 17 CFR
240.14a(b)(9)(v) (``Rule 14a-2(b)(9)(v)'') excludes from the notice
requirement of new 17 CFR 240.14a-2(b)(9)(ii) (``Rule 14a-
2(b)(9)(ii)'') proxy voting advice to the extent such advice is based
on custom policies.\169\ As such, notwithstanding the fact that we are
not excluding from the definitions of ``solicit'' and ``solicitation''
proxy voting advice that is based on custom policies, we believe that
we have appropriately taken into account the substance of these
commenters' concerns.
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\165\ Commission Interpretation on Proxy Voting Advice at 47418.
For a description of the services that one major proxy voting advice
business offers in connection with its clients' custom policies, see
ISS, Custom Pol'y & Res., available at https://www.issgovernance.com/solutions/governance-advisory-services/custom-policy-research/(last visited Jun. 19 2020).
\166\ See infra Section II.D. for a discussion of the amendments
we are adopting to Rule 14a-9 and Section II.B infra for a
discussion of new Rule 14a-2(b)(9)(i).
\167\ See supra note 112 and accompanying text.
\168\ See, e.g., letter from ISS (expressing concern about
disclosing ``clients' proprietary custom voting policies and the
recommendations based thereon'' and doubt as to the ``investor
protection to be gained by allowing issuers to vet the methodologies
and assumptions institutional investors choose to implement for
their own portfolios'').
\169\ See infra Section II.C.3.c.i.
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As noted above, one commenter asserted that proxy voting agent
businesses should not be subject to the same regulations as proxy
voting advice businesses.\170\ The commenter's position that its
services differ from a proxy voting advice business's and should not be
considered a ``solicitation'' appears to be based, in part, on the fact
that it only votes its clients' shares in accordance with its clients'
custom policies.\171\ As with any other person, including any proxy
voting advice business, to the extent a business is providing proxy
voting advice to a client--regardless of whether such advice is based
on its proprietary benchmark or specialty policies or its client's
custom policies--such advice will constitute a ``solicitation'' under
Rule 14a-1(l)(1)(iii)(A). However, the commenter and another
commenter--both of which are investment advisers and were identified as
proxy voting advice businesses in the Proposing Release--also asserted
that their activities do not constitute ``solicitations'' because they
vote their clients' shares on behalf of their clients rather than
providing them with voting recommendations.\172\ We agree that to the
extent a business that provides proxy voting services is not providing
any voting recommendations and is instead exercising delegated voting
authority on behalf of its clients, such services generally will not
constitute ``proxy voting advice''--and, therefore, not be a
``solicitation''--under Rule 14a-1(l)(1)(iii)(A).\173\
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\170\ See supra note 113 and accompanying text.
\171\ See letter from Segal Marco II.
\172\ See supra notes 99-100 and accompanying text.
\173\ Separately, we note that the Commission has provided
guidance to investment advisers which discusses how the fiduciary
duty and rule 206(4)-6 under the Advisers Act relate to an
investment adviser's exercise of voting authority. See infra note
400.
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With respect to Rule 14a-1(l)(2), we are also amending this
provision as proposed to add paragraph (v) to make clear that the terms
``solicit'' and ``solicitation'' do not include any proxy voting advice
provided by a person who furnishes such advice only in response to an
unprompted request. This amendment codifies the Commission's historical
view that such a communication should not be regarded as a solicitation
subject to the proxy rules.\174\ As we explained in the Proposing
Release, we believe that a proxy voting advice business providing
voting advice to a client where the client's request for the advice has
been invited and encouraged by such business'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. In
our view, the information and filing requirements of the proxy rules
(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 new conditions we are adopting to the
exemptions described below, are appropriate for a person who chooses to
actively market and sell its proxy voting advice as that person's
actions are reasonably designed to result in the procurement,
withholding, or revocation of a proxy. Those requirements, however, 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 its client is unlikely to anticipate the
need to establish the internal processes necessary to comply with the
new conditions we are adopting to the exemptions in Rules 14a-2(b)(1)
and 14a-2(b)(3).
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\174\ See supra note 84.
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We also believe, based on our understanding of the dynamics of the
proxy voting advice market as it currently operates, that a person that
provides proxy voting advice only in
[[Page 55096]]
response to unprompted requests and does not market its expertise in
such services is less likely to present an investor protection or
market integrity concern. For example, we believe such one-off advice
to individual clients lacks the system-wide significance of advice
provided by proxy voting advice businesses who, as described above,
have come to occupy a unique and important position in that
process.\175\ Although one commenter recommended that 17 CFR 240.14a-
1(l)(2)(v) (``Rule 14a-1(l)(2)(v)'') be narrowed to exclude only proxy
voting advice furnished pursuant to an unprompted request if such
advice is also provided ``not for compensation,'' \176\ we consider
that amendment unnecessary. In our view, any compensation that may be
received for such unprompted proxy voting advice does not present the
same investor protection or regulatory concerns because such persons
are less likely to engage in widespread marketing of their expertise in
providing proxy voting advice.
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\175\ See supra notes 6-10 and accompanying text.
\176\ See letter from Exxon Mobil.
---------------------------------------------------------------------------
As noted above, one commenter opposed the amendment to Rule 14a-
1(l)(2) on the basis that investment advisers and broker-dealers may
avoid announcing their willingness to provide voting advice on Forms
ADV and CRS out of concern that they would fall outside the scope of
new Rule 14a-1(l)(2)(v) and be deemed to be prompting a request for
proxy voting advice.\177\ We believe, however, that the text of new
Rule 14a-1(l)(1)(iii)(A) is sufficiently precise to avoid this concern.
Where an investment adviser or broker-dealer is describing the services
it provides to its clients or customers, which may include proxy voting
advice, we believe that such investment adviser or broker-dealer should
not be deemed to be ``market[ing] its expertise as a provider of such
proxy voting advice, separately from other forms of investment advice,
and sell[ing] such proxy voting advice for a fee.'' \178\ This same
commenter also expressed concern that the amendment to Rule 14a-1(l)(2)
could be counterproductive from an investor protection standpoint as
the proxy rules would apply to experts with proxy advice-related skills
and resources but not to individuals with less relevant expertise who
engage in the same activities.\179\ We disagree. As we noted in the
Proposing Release,\180\ we believe that those persons providing voting
advice in response to unprompted requests likely will be furnishing
such advice to a client with whom there is an existing business
relationship. As noted above, proxy voting advice provided under these
circumstances does not present 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 institutional investors who are often voting
on behalf of other investors.\181\
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\177\ See letter from ISS.
\178\ 17 CFR 240.14a-1(l)(1)(iii)(A); see also supra notes 124-
125.
\179\ See supra note 117 and accompanying text.
\180\ See Proposing Release at 66523.
\181\ See supra text accompanying note 176.
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B. Amendments to Rule 14a-2(b): Conflicts of Interest
1. Proposed Amendments
Over the years, many observers have noted that some proxy voting
advice businesses engage in activities or have relationships that could
reasonably be expected to affect the objectivity or reliability of
their advice.\182\ Examples of circumstances where the interests of a
proxy voting advice business may diverge materially from the interests
of the clients who utilize their advice include:
---------------------------------------------------------------------------
\182\ See Proposing Release at 66525 n.73.
---------------------------------------------------------------------------
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 (or
is seeking to earn fees) from that registrant for providing advice on
corporate governance and compensation policies; \183\
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\183\ See id. at n.74.
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A proxy voting advice business providing voting advice on
a matter in which its affiliates or one or more of its clients has a
material interest, such as a business transaction or a shareholder
proposal put forward by or actively supported by that client or group
of clients;
A proxy voting advice business providing ratings to
institutional investors of registrants' corporate governance practices
while at the same time consulting for, or seeking to consult with,
registrants that are the subject of the ratings for a fee to help
increase their corporate governance scores;
A proxy voting advice business providing voting advice
with respect to a registrant's shareholder meeting while affiliates of
the proxy voting advice business hold a significant ownership interest
in the registrant, sit on the registrant's board of directors, or have
relationships with a shareholder presenting a proposal covered by the
proxy voting advice; and
A proxy voting advice business providing voting advice on
a matter on which it or its affiliates have provided advice to a
registrant, a proponent, or other party regarding how to structure or
present the matter or the business terms to be offered in such matter.
These and similar types of circumstances create a risk that the
proxy voting advice business's voting advice could be influenced by the
business's own interests, which may call into question the objectivity
and independence of its advice.\184\ The clients of the proxy voting
advice business would generally need to be informed of such activities
and relationships in order to be in a position to reasonably assess the
impact and materiality of any actual or potential conflicts of interest
with respect to the proxy voting advice they receive.\185\ 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, and any measures taken to mitigate such conflicts, these
clients may not have sufficient information to reasonably understand
and adequately assess these potential conflicts and remedial measures
when they evaluate the voting advice and make their voting
determinations.\186\ A range of proxy voting advice business clients
may find it important to have sufficient information to support their
understanding and assessment, including, for example, investment
advisers that undertake proxy voting duties on a client's behalf.\187\
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\184\ See id. at n.75.
\185\ See id. at n.72.
\186\ See id. at 66526 n.78 and infra note 193.
\187\ Commission Guidance on Proxy Voting Responsibilities at
47425 (``[A]n investment adviser's decision regarding whether to
retain a proxy advisory firm should also include a reasonable review
of the proxy advisory firm's policies and procedures regarding how
it identifies and addresses conflicts of interest.'').
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In light of these concerns, the Commission proposed amendments to
further ensure that sufficient information about material conflicts of
interest would be provided consistently across proxy voting advice
businesses and in a manner readily accessible to the clients of the
proxy voting advice businesses. Accordingly, the proposed amendments
included a requirement that persons who provide proxy voting
advice,\188\ in order to rely on the
[[Page 55097]]
exemptions contained in Rule 14a-2(b)(1) and (b)(3), must include in
such advice (and in any electronic medium used to deliver the advice)
the following disclosures specifically tailored to proxy voting advice
businesses and the nature of their conflicts of interest:
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\188\ Consistent with the Commission's proposed amendments to
the definition of solicitation under the proxy rules, the
requirement would apply only to proxy voting advice falling within
the scope of amended Rule 14a-1(l)(1)(iii)(A). See supra Section
II.A., ``Codification of Commission's Interpretation of
Solicitation.''
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Any material interests, direct or indirect, of the proxy
voting advice business (or its affiliates \189\) in the matter or
parties concerning which it is providing the advice;
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\189\ The term ``affiliate,'' as used in proposed Rule 14a-
2(b)(9)(i), would have the meaning specified in Exchange Act Rule
12b-2.
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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 \190\), (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;
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\190\ The Commission recognized 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 other information regarding the interest, transaction,
or relationship of the proxy voting advice business (or its affiliates)
that is material to assessing the objectivity of the proxy voting
advice in light of the circumstances of the particular interest,
transaction, or relationship; and
Any policies and procedures used to identify, as well as
the steps taken to address, any such material conflicts of interest
arising from such interest, transaction, or relationship.\191\
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\191\ This would 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.
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In the Proposing Release, the Commission stated that the
disclosures provided under these provisions should be sufficiently
detailed so that clients of proxy voting advice businesses could
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.\192\ This might include, for
example, the identities of the parties or affiliates involved in the
interest, transaction, or relationship triggering the proposed
disclosure requirement and, when 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, including language stating that
``such relationships or interests may or may not exist,'' would be
insufficient for purposes of satisfying this condition to the
exemptions.
---------------------------------------------------------------------------
\192\ Proposing Release at 66526.
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2. Comments Received
Many commenters agreed with the general principle that providing
clients of proxy voting advice businesses with adequate conflicts of
interest disclosure helps to ensure transparency and fairness in the
voting process and is vital to the clients' ability to make informed
voting decisions.\193\ Some commenters expressed the view that proxy
voting advice businesses currently do not satisfactorily mitigate the
risk that conflicts of interest may impair their objectivity and,
consequently, that their ability to provide impartial voting advice is
often undermined by the prevalence of conflicts.\194\
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\193\ See letters from commenters generally opposed to the
proposals, e.g., CalSTRS (``We agree that conflict of interest
disclosure is important for a well-functioning and unbiased proxy
voting system. Investors should be informed when there may be
potential conflicts of interest that could affect proxy advisor
recommendations. Investors need confidence that the research being
considered when voting is unbiased and fact based . . . .''); CFA
Institute I; CII IV; ISS; and the IAC Recommendation. See also
letters from commenters generally supporting the proposals, e.g.,
ACCF (``Investors need to be fully informed of the biases and
conflicts inherent in [the] powerful vote recommendations [of proxy
voting advice businesses].''); BRT (``. . . conflicts of interest
that may arise for proxy advisors should be disclosed in order for
their clients to assess for themselves the effect and materiality of
any actual or potential conflicts of interest with respect to a
voting recommendation . . . We agree with the Commission's
assessment that institutional investors and investment advisers who
rely on proxy advisors for voting guidance cannot identify potential
risks 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.''); Exxon Mobil Corp., (Feb. 3,
2020) (``ExxonMobil''); Tao Li, Ph.D., Assistant Professor of
Finance, University of Florida (Jan. 30, 2020) (``Prof. Li'') (``. .
. it remains imperative that market participants are aware of any
potential conflicts of interest within the industry and whether
those conflicts are impeding the role of proxy advisors as
independent providers of information and recommendations.''); NAM;
Nareit; Nasdaq; SCG; CCMC.
\194\ See, e.g., letters from ACCF (citing its May 2018 research
paper: ``The Conflicted Role of Proxy Advisors''); BIO; BRT; CEC;
CCMC; ExxonMobil; Jason Ward, Managing Partner, Amrop Industrial
Search LLC (Feb. 3, 2020) (``J. Ward''); NAM; Nareit; Nasdaq; SCG.
To substantiate their claims that conflicts of interest are
pervasive in proxy voting advice, several commenters pointed to the
results of various opinion surveys of selected companies and
individuals reflecting significant concerns about conflicts of
interest. See, e.g., letters from CCMC; Ashley Baker, Director of
Public Policy, The Committee for Justice, (Feb. 3, 2020)
(``Committee for Justice''); J. Ward; Nareit; Nasdaq; P. Mahoney and
J.W. Verret; SCG; Seven Corners Capital Management, LLC (Apr. 8,
2020) (``Seven Corners'').
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Some commenters opposed the proposed amendments,\195\ asserting
that additional conflict disclosure requirements were not justified
\196\ and, therefore, would impose unnecessary additional costs and
burdens on proxy voting advice businesses and their clients.\197\ These
commenters challenged, among other things, the claims that proxy voting
advice businesses' conflicts of interest disclosures were materially
deficient,\198\ and contended that the businesses' existing policies
and procedures (such as their disclosure practices and maintenance of
internal firewalls to guard against conflicts) adequately addressed the
risk of conflicts.\199\ In support of this view, commenters noted that
the predominant opinion among the
[[Page 55098]]
businesses' own clients was that the measures taken to mitigate
conflicts of interest were satisfactory.\200\ Moreover, commenters
argued that adding new disclosure requirements to the proxy rules was
unnecessary in light of existing provisions in the Advisers Act and in
Rule 14a-2(b) under the Exchange Act that already address conflicts of
interest, as well as inappropriate because the Advisers Act generally
governs the activities of investment advisers, including proxy voting
advice businesses.\201\ In addition, some commenters believed that the
proposed conflicts disclosure requirements would likely compromise the
internal firewalls designed by proxy voting advice businesses to
mitigate their risk of conflicts,\202\ and could have a detrimental
effect on competition in an industry that is already cost-prohibitive
for new entrants.\203\
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\195\ See, e.g., letters from CalPERS; Canadian Governance
Coalition; CII IV; JoAnn Hanson, President and CEO, Church
Investment Group (Jan. 29, 2020) (``Church Investment Group'');
Colorado PERA; Henry Beck, Maine State Treasurer, et al., Democratic
Treasurers Association (Jan. 30, 2020) (``DTA''); Holly A. Testa,
Director, Shareowner Engagement, First Affirmative Financial Network
(Jan. 3, 2020) (``First Affirmative''); Jeffery W. Perkins,
Executive Director, Friends Fiduciary Corporation (Feb. 2, 2020)
(``Friends''); Glass Lewis II; ISS; Interfaith Center II; J. Coates,
Professor of Law and Economics, Harvard Law School, and Barbara
Roper, Consumer Federation of America (Jan. 30, 2020) (``Prof.
Coates''); New York Comptroller II; PIAC II; Public Retirement
Systems; ValueEdge I.
\196\ See, e.g., letters from Colorado PERA (``PERA utilizes
research reports from Glass Lewis and ISS to assist with its
evaluation of items on a proxy ballot. PERA has analyzed each firm's
disclosures and management of conflicts of interest. We concluded
that the potential conflicts are harmless to the independence of the
research, would not sway an investor's opinion, and the existing
firewalls to prevent contamination of objectivity--where applicable
to specific proxy advisors--are sufficient''); CalSTRS; Glass Lewis
II; ISS.
\197\ See, e.g., letters from CalPERS; Canadian Governance
Coalition; CII IV; Church Investment Group; DTA; First Affirmative;
Friends; Glass Lewis II; ISS; Interfaith Center II; New York
Comptroller II; Colorado PERA; PIAC II; Prof. Coates; Public
Retirement Systems; ValueEdge I.
\198\ See, e.g., letters from CalPERS (``We see no evidence that
conflicts of interest with proxy advisors have led to voting advice
that conflicts with our voting policies . . . It is not clear to
what extent the SEC has reviewed all of the disclosures that proxy
voting advice businesses already provide.''); CalSTRS; CII IV; Glass
Lewis II; ISS; New York Comptroller II; Colorado PERA; PIAC II;
ValueEdge I.
\199\ See, e.g., letters from CalSTRS (stating that while it is
generally supportive of conflict of interest disclosure, it does
``not believe the SEC needs to create a new regulatory structure to
enforce such [conflict of interest] disclosure'' and its general
belief ``that proxy advisors are currently providing adequate
disclosures that meet the needs of investors, and any modifications
to disclosures can be enforced through existing SEC authority.'');
ISS; Glass Lewis II; CalPERS; New York Comptroller II.
\200\ See, e.g., letters from ISS (``. . . the fact that the
most vocal critics of ISS in this area [regarding conflicts of
interest] are those who speak on behalf of corporate management, and
not the investors who rely on ISS' research and vote
recommendations, indicates that ISS is managing this potential
conflict extremely well.''); CalPERS; CalSTRS; Glass Lewis II; New
York Comptroller II.
\201\ See, e.g., letter from ISS (asserting that ``the proposal
ignores the relevance of the Advisers Act regime and makes no
attempt to explain why this framework is inadequate to address the
Commission's purported concerns about proxy advice''). As noted
above, 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. See supra notes 41 through 60 and accompanying text for
a discussion of why we believe it is appropriate that proxy voting
advice businesses be subject to applicable rules under Section 14(a)
when they provide proxy voting advice, regardless of whether they
are registered under the Advisers Act.
\202\ For example, according to ISS, it maintains a firewall
between ISS Global Research, its core institutional business, and
ISS Corporate Solutions, Inc. (``ICS''), a subsidiary which provides
governance tools and services to corporate issuer clients. In its
comment letter, ISS states that ``a key goal of the firewall is to
keep the ISS Global Research team from knowing the identity of ICS'
clients,'' which could be jeopardized by disclosure of the details
of ICS' business and potentially result in vote recommendations that
are biased in favor of corporate management. As part of its
conflicts of interest policies, Glass Lewis blocks its research
analysts from any access to the holdings, custom policies and/or
voting activity of its two co-owners, the Ontario Teachers' Pension
Plan Board and Alberta Investment Management Corp. See e.g., letters
from CII IV; Glass Lewis II; ISS. See also IAC Recommendation.
\203\ See, e.g., letters from CalPERS; CII IV; ISS; PERA (``This
disclosure of . . . anything that may potentially be deemed a
conflict of interest could result in advisors losing their
competitive advantage.''); and the IAC Recommendation. See also
letter from CFA Institute I (``We do not object to such increased
transparency as long as these further disclosures do not compromise
the competitiveness of a proxy adviser by forcing them to divulge
trade secrets or other proprietary information, the disclosure of
which would be deleterious to the specific adviser'').
---------------------------------------------------------------------------
Both those supporting and those opposing the proposed Rule 14a-
2(b)(9)(i) recommended modifications to the proposed new disclosure
requirements,\204\ ranging from very specific suggestions intended to
standardize the presentation of conflicts disclosures,\205\ expand the
breadth of required disclosure,\206\ and capture certain detailed
information,\207\ to those that were less prescriptive and leaned
toward a more principles-based approach,\208\ with an emphasis on
materiality.\209\ Other commenters recommended certain substantive
changes that would have widened the scope of the proposed amendments
beyond conflicts disclosure.\210\
---------------------------------------------------------------------------
\204\ See, e.g., letters from Lynette C. Fallon, EVP HR/Legal
and General Counsel, Axcelis Technologies, Inc. (Jan. 20, 2020)
(``Axcelis''); Baillie Gifford; BRT; CEC; CII IV; CIRCA; Exxon
Mobil; Garmin; Glass Lewis II; ISS; Jonathan Chanis, New Tide Asset
Management, LLC (Jan. 30, 2020) (``J. Chanis''); Mylan; Ann
McGinnis, Co-President et al., Los Angeles Chapter, National
Investor Relations Institute, Los Angeles Chapter (Feb. 3, 2020)
(``NIRI-LA''); David Erickson, President, et. al., National Investor
Relations Institute, Orange County Chapter (Feb. 4, 2020) (``NIRI-
OC''); June M. Vecellio, President, and James B. Bragg, Advocacy
Ambassador, National Investor Relations Institute, Connecticut/
Westchester County Chapter (Feb. 6, 2020) (``NIRI-Westchester'');
Nasdaq; Prof. Li; SCG; Seven Corners; SES; Linda Moore, President
and CEO, TechNet, (Feb. 3, 2020) (``TechNet'').
\205\ See, e.g., letters from Nasdaq; NIRI-LA; NIRI-OC; NIRI-WC;
TechNet (calling for conflicts of interest to be disclosed on the
front page of proxy voting advice).
\206\ See, e.g., letters from ExxonMobil (supporting a
requirement for specific disclosures about proxy voting advice
businesses' specialty reports that are driven by goals other than
maximizing shareholder value); SCG (recommending that proxy voting
advice businesses be required to disclose ``any interest,
transaction or relationship that may present a conflict of interest,
and the dollar amount thereof'').
\207\ See, e.g., letters from ExxonMobil (recommending that
required conflict disclosures cover details similar to the
requirements of Item 404(a) of Regulation S-K and enumerating a list
of specific items that should be addressed by disclosure); PIRC
(suggesting that disclosure of specific amounts of compensation
received from various clients could be helpful).
\208\ See, e.g., letters from Baillie Gifford (cautioning that
requiring disclosure of policies and procedures would lead to
boilerplate disclosure); CII IV (asserting that allowing proxy
voting advice businesses to choose the vehicle by which they
disclose conflicts of interest would mitigate the widespread
distribution of information that could affect competitive or other
concerns); CIRCA (stating that a principles-based approach ``would
prevent proxy advisors from giving boilerplate disclosures . . .
without creating unprecedented and excessive burdens.''); ISS
(stating that ``there is no reason to treat conflict disclosure by
proxy advisers any differently from the way conflict disclosure by
portfolio managers or any other type of investment adviser is
treated.''); S. Holmes.
\209\ See, e.g., letter from Baillie Gifford.
\210\ See, e.g., letters from Garmin (recommending that the
Commission require proxy voting advice businesses to separate their
proxy advisory businesses from their consulting businesses); J.
Chanis (recommending that the Commission prohibit proxy voting
advice businesses from also providing consulting services to
companies that are the subject of their proxy voting advice).
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3. Final Amendments
We are adopting amendments to Rule 14a-2(b) to require that persons
who provide proxy voting advice in reliance on the exemptions in either
Rule 14a-2(b)(1) or (b)(3) must include in their voting advice to
clients the conflicts of interest disclosure specified in new Rule 14a-
2(b)(9)(i). The Commission is adopting these amendments substantially
as proposed, but with certain modifications as discussed below, to
clarify and streamline the rule in response to commenters' concerns and
suggestions.
As adopted, Rule 14a-2(b)(9)(i) establishes a principles-based
requirement, based on a standard of materiality, that will apply to all
proxy voting advice that is provided in reliance on the exemptions in
Rules 14a-2(b)(1) and (b)(3). Contrary to the views of some commenters,
we do not see this requirement as imposing an entirely new regulatory
regime or structure.\211\ Rather, we view Rule 14a-2(b)(9)(i) as
enhancing the existing conflicts of interest disclosures that proxy
voting advice businesses currently provide in order to rely on the
exemptions from the proxy rules' information and filing requirements.
By articulating a standard for disclosure that focuses on information
that would be material to assessing the objectivity of the proxy voting
advice, the new rule is expected to result in disclosure that is more
tailored and comprehensive than would be required under either Rule
14a-2(b)(1) or (b)(3).\212\ Given the significant role played by proxy
voting advice businesses in the voting process, we believe that the
articulation of clear minimum disclosure standards is appropriate to
better ensure transparency, accuracy, and completeness in the
information provided, as well as the integrity of the proxy voting
process. Rule 14a-2(b)(9)(i)
[[Page 55099]]
is intended to harmonize the conflicts of interest disclosure that
proxy voting advice businesses provide to their clients, helping to
ensure that sufficient information about material conflicts of interest
is disclosed more consistently across proxy voting advice businesses
and in a manner readily accessible to the clients of such businesses.
As a consequence, we believe the rule will enable clients of proxy
voting advice businesses to make more informed voting decisions,
including with regard to how proxy voting advice businesses identify
and address conflicts of interest on a business-specific and relative
basis and help in Commission oversight of the proxy voting
process.\213\
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\211\ See, e.g., letters from CalSTRS ([W]e do not believe the
SEC needs to create a new regulatory structure to enforce such
disclosure.''); Glass Lewis II (``Accordingly, this issue [of
conflicts of interest disclosure] does not present a basis for a
wholesale new and burdensome regulatory regime . . . .'').
\212\ 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). It should be
noted that both exemptions 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 institutional investors.
\213\ Currently, proxy voting advice businesses differ in how
they disclose their conflicts of interest. For example, 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 appear 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 (2019) (``ISS FAQs''),
available at https://www.issgovernance.com/file/faq/ISS_Guidance_FAQ_Document.pdf. See also Proposing Release at 66527,
n. 90; letter from Glass Lewis II.
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Although some proxy voting advice businesses and others have
asserted that the businesses' existing practices and procedures
adequately address conflicts of interest concerns,\214\ we believe that
the absence of a disclosure requirement specifically contemplating the
conflicts of interest that can arise for proxy voting advice businesses
in relation to proxy voting advice means that there has not been a
sufficient standard against which clients may assess the quality of the
conflicts disclosures they receive. Conditioning the exemptions in
Rules 14a-2(b)(1) and (3) for proxy voting advice on the proxy voting
advice business's adherence to a set of minimum, principles-based
disclosure standards will make clear what constitutes basic information
regarding conflicts of interest that all parties can expect when
receiving voting advice and will bolster the completeness and
consistency of such disclosure by making it a regulatory requirement.
This should in turn foster greater confidence in the services proxy
voting advice businesses offer to their clients and provide greater
assurance to market participants that shareholders' interests are being
properly considered through a well-functioning proxy system.\215\
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\214\ See supra note 200 and Proposing Release at 66544 n.226.
\215\ See infra Section IV.A.
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To that end, Rule 14a-2(b)(9)(i) sets forth a concise framework
that applies to any person providing proxy voting advice within the
scope of proposed Rule 14a-1(l)(1)(iii)(A) who wishes to utilize the
exemption in either Rule 14a-2(b)(1) or (b)(3). Such persons must
include in their voting advice (or in any electronic medium used to
deliver the advice) prominent disclosure of:
Any information regarding an interest, transaction, or
relationship \216\ 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; \217\ and
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\216\ Such information may include disclosure about certain
business practices in which the proxy voting advice business engages
that might reasonably be expected to call into question its
objectivity and the independence of its advice. For example, it may
be appropriate in some circumstances under the rule for a proxy
voting advice business to disclose its practice of selectively
consulting with certain clients before issuing its benchmark voting
recommendation on a specific matter (e.g., a contested director
election or merger). This may particularly be the case in situations
in which the clients with whom the proxy voting advice business
consults are not directly involved as a party to the specific matter
but are expected to receive proxy voting advice on the matter. Such
a practice could allow for those consulted clients' voting
preferences to influence recommendations given to other clients that
were not consulted and importantly, without the knowledge of those
clients not consulted.
\217\ Rule 14a-2(b)(9)(i)(A).
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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.\218\
---------------------------------------------------------------------------
\218\ Rule 14a-2(b)(9)(i)(B).
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The rule, as adopted, reflects our intent to avoid an overly
prescriptive disclosure requirement with specific monetary thresholds,
in favor of a more principles-based rule that is sufficiently flexible
to encompass a wide variety of circumstances that may not fall within
pre-determined parameters but nevertheless could materially impact a
client's assessment of the proxy voting advice business's objectivity.
This approach also is consistent with the views of several commenters
who favored a principles-based disclosure requirement that could more
easily accommodate a variety of different facts and circumstances.\219\
As such, Rule 14a-2(b)(9)(i) establishes a general standard for
conflicts of interest disclosure, but allows the proxy voting advice
business to apply its judgment and unique knowledge of the facts to
determine the materiality of conflicts that might pose a risk to the
objectivity of its advice.
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\219\ See, e.g., letters from Baillie Gifford; CII IV; CIRCA,
Glass Lewis II; ISS (``Proxy advisers should be governed by a
principles-based regulatory regime. For this reason, the Commission
should not require such firms to disclose specific qualitative or
quantitative information or impose prescriptive standards regarding
the method of conflict disclosure.'').
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The final rule also gives the proxy voting advice business
flexibility to determine the precise level of detail needed about any
identified conflicts of interest,\220\ or whether a relationship or
interest that has been terminated should nevertheless be
disclosed.\221\ In each particular case, the rule gives the proxy
voting advice business the discretion to determine which situations
merit disclosure and the specific details to provide to its clients
about any conflicts of interest identified. The key determinant will be
whether the information is material to an evaluation of the proxy
voting advice business's objectivity.
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\220\ For example, the proxy voting advice business would have
the discretion, on a case-by-case basis, to determine whether
specific monetary amounts related to any potential and/or actual
conflicts identified should be disclosed. See letter from CII IV
(``We do not believe that proxy voting advice businesses should be
required to disclose the specific amounts that they receive from the
relationships or interests covered by the proposed conflicts of
interest disclosures . . . there is no reliable evidence indicating
that institutional investor clients believe that level of detail is
necessary in all circumstances. To the extent that investors want
this information, they are at liberty to seek it from the proxy
advisory firm(s) they hire, and make it a condition for hiring a
proxy advisor.''). We note, however, that Rule 14a-2(b)(9)(i) should
not be interpreted to mean that disclosure of specific amounts would
never be necessary. There may be situations, depending on the
particular facts and circumstances, in which this information would
be material to assessing the objectivity of the proxy voting advice
and therefore should be disclosed. Similarly, the proxy voting
advice business would have the discretion to determine whether the
number of instances of substantive engagement it has had with
existing clients as well as any other third parties providing
substantive input to the proxy voting advice business as it develops
its advice may have created a material conflict of interest that
should be disclosed.
\221\ See, e.g., letter from Baillie Gifford (``A more
principles-based requirement is preferable because whether a matter
is material to the proxy advice will depend on the facts and
circumstances. For example, in some situations it may be relevant
that a proxy advisor had an historical relationship with a
registrant, albeit that the relationship is no longer live, if the
relationship were very significant in terms of duration or value. In
other cases, less significant relationships will cease to be
relevant as soon as they come to an end. It should be for the proxy
advisors to make the assessment and for their clients to understand
how the advisor makes this determination as part of regular due
diligence.'').
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A more prescriptive disclosure requirement, while relying less on
the proxy voting advice business's judgment, risks being either under-
or over-inclusive. For instance, there may be scenarios or
relationships of which we are not aware or that, at this point in time,
do not exist that present or would present material conflicts.\222\
[[Page 55100]]
Instead, by adopting a rule with materiality as its focus, we have
opted for an approach that is more adaptable to varied circumstances.
The concept of materiality is at the core of our disclosure framework
and has served our markets and investors well. Therefore, we believe
that requiring proxy voting advice businesses to base their conflicts
of interest disclosures on assessments of materiality is a more
effective way to ensure that their clients have sufficient information
to weigh the voting advice they are given.
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\222\ See discussion supra pp. 51-52.
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Substantively, Rule 14a-2(b)(9)(i) is consistent with the
Commission's proposal, but we have modified the wording in an effort to
further simplify the requirement. We agree with a commenter who
suggested that the proposed regulatory text could be streamlined to
both capture the full scope of conflicts-related disclosure and retain
the focus on principles of materiality.\223\ Therefore, consistent with
the suggestions of these commenters, the rule condenses proposed
subsections (A), (B), and (C) of paragraph (b)(9)(i) into a single
subsection (A) that requires disclosure of ``any information regarding
an 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.'' \224\
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\223\ See letter from ISS.
\224\ Rule 14a-2(b)(9)(i)(A), as adopted, substantially
resembles proposed subsection (C) that was designed as a catch-all
to elicit disclosure of any information not otherwise captured by
the other provisions of the rule regarding an interest, transaction,
or relationship that would be material to a reasonable investor's
assessment of the objectivity of the proxy voting advice. In
addition, we note that the final amendment does not retain the
concept from proposed subsection (B) providing that required
disclosures would be determined using publicly available
information. Although this provision was intended to limit the scope
of a proxy voting advice business's disclosure obligation, we agree
with commenters that any interest, transaction or relationship of
which a proxy voting advice business is not already aware logically
could not bias the business's proxy advice. See letter from ISS
(``If such a search [of publicly available information] uncovers a
possible affiliation ISS was not otherwise aware of, there would be
no benefit to offset the cost and delay because any such
relationship could not have compromised the integrity of the proxy
advice in the first place.'').
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We note that some commenters recommended ways to improve the
proposal by including additional substantive requirements or specific
parameters designed to more clearly indicate the disclosure obligations
of proxy voting advice businesses under the rule.\225\ For example, one
commenter suggested that more guidance was needed regarding the
timeframe for which the disclosure of conflicts should be
provided.\226\ As discussed above, however, we believe that a more
principles-based approach will best serve to provide the clients of
proxy voting advice businesses with adequate disclosure regarding
conflicts while balancing the varied and unique circumstances of such
businesses. We are therefore not persuaded that more prescriptive
modifications are necessary or preferable to the rule, as adopted,
which describes a general principle rather than delineating particular
disclosure items.
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\225\ See, e.g., letters from CEC (recommending that the rule
include examples of per se conflicts of interest and illustrations
of compliant disclosures); Mylan (recommending that disclosure be
required for ``every instance of substantive engagement'' between a
proxy voting advice business and existing clients, as well as any
other third party providing substantive input regarding the proxy
voting advice business's recommendations); PIRC; Prof. Li; SCG
(recommending that disclosure of the dollar amount of any interest,
transaction, or relationship that may present a conflict of interest
for the proxy voting advice business should be required and asking
for clarification of what constitutes a ``material'' interest,
transaction, or relationship (e.g., revenue, terms of the contracts,
etc.)).
\226\ See, e.g., letter from Prof. Li.
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Because our concern is with ensuring that proxy voting advice
business clients have the ability to assess the objectivity, and
ultimately the reliability, of proxy voting advice, we believe it would
not serve the interests of those who depend on voting advice to place
precise limits on what would be considered material information. For
example, if a proxy voting advice business has been retained by a
shareholder to provide voting advice regarding a registrant for which
the business once provided consulting services, and if it has had no
business relationship with the registrant for some years and is not
seeking a business relationship with the registrant, it may be unlikely
that the nature of its relationships with the registrant would be
deemed material to an assessment of the business's ability to
objectively advise its client. In that circumstance, the proxy voting
advice business, which is in the best position to make such a judgment,
would need to consider, based on the relevant facts and circumstances,
whether that prior engagement is currently material and should be
disclosed to clients.
Another benefit of the principles-based nature of Rule 14a-
2(b)(9)(i) is that it will provide proxy voting advice businesses
significant flexibility over the manner in which conflicts information
is disclosed, so long as the basic requirements are met. The rule
requires that prominent disclosure of material conflicts of interest be
included in the voting advice to ensure that this information is
readily accessible to clients and facilitates their ability to consider
such disclosure together with the proxy voting advice at the time they
make their voting decisions.\227\ It does not, however, dictate the
particular location or presentation of the disclosure in the advice or
the manner of its conveyance as some commenters recommended.\228\ Doing
so would undermine our intent to give latitude to proxy voting
businesses to fashion their disclosure as they judge best, in
recognition of the varied circumstances in which they provide their
services.
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\227\ A proxy voting advice business that only provides such
disclosures upon request from the client would not be in compliance
with the required disclosure in Rule 14a-2(b)(9)(i) and, therefore,
would not satisfy the conditions of the exemptions in Rules 14a-
2(b)(1) or (b)(3). We believe that imposing an affirmative duty on
proxy voting advice businesses to provide the required disclosures
of material conflicts of interest is consistent with obligations to
disclose potential conflicts of interest in other contexts. See
Proposing Release at 66527, n. 88.
\228\ See, e.g., letters from BRT; Exxon Mobil; Nasdaq; NIRI-LA;
NIRI-OC; SCG; SES; TechNet.
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Along these lines, the final rule differs from the proposal
regarding the conveyance of conflicts disclosure. As proposed, the rule
would have required a proxy voting advice business to include conflicts
of interest disclosure ``in its proxy voting advice and in any
electronic medium used to deliver the advice,'' \229\ to ensure that
the information is prominently disclosed regardless of the means by
which the advice is disseminated. However, some commenters were
concerned that this was overly prescriptive and would interfere with
proxy voting advice businesses' existing conflict management policies
and procedures designed to safeguard information and prevent it from
undermining the objectivity and independence of the businesses' voting
advice.\230\ These commenters pointed out that displaying conflict
disclosures in every piece of proxy advice, including written proxy
research reports, would compromise the ability of proxy voting advice
businesses
[[Page 55101]]
to mitigate their risk of conflicts and expressed concern that the
proposal would increase compliance costs for proxy voting advice
businesses.\231\
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\229\ Proposed Rule 14a-2(b)(9)(i).
\230\ See, e.g., letters from Glass Lewis II (discussing the
restrictions in place to prevent its analysts from accessing
information about the interests and voting activities of Glass
Lewis' owners); ISS (discussing the firewall that it maintains
between its core institutional proxy advisory business and its
subsidiary that provides governance tools and services to corporate
issuer clients and stating that ``ISS has implemented a
comprehensive and robust set of conflict controls . . . which would
be compromised if conflict information were required to be publicly
disclosed, or if disclosure were required to be displayed in or on a
research report, instead of `around' the report as is currently the
case'').
\231\ See id.
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We agree that proxy voting advice businesses should have the
latitude to convey their conflict disclosures to clients in a manner
that does not run afoul of the businesses' own mechanisms for
mitigating the risk of biased advice, such as establishing internal
firewalls to maintain the objectivity of the advice, so long as their
conflict disclosures are readily accessible to their clients and
provided as part of the proxy voting advice they receive. Accordingly,
the rule we are adopting gives a proxy voting advice business the
option to include the required disclosure either in its proxy voting
advice or in an electronic medium used to deliver the proxy voting
advice, such as a client voting platform, which allows the business to
segregate the information, as necessary, to limit access exclusively to
the parties for which it is intended.\232\
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\232\ Rule 14a-2(b)(9)(i). This approach also accords with the
views of commenters who requested that the Commission permit the
proxy voting advice businesses flexibility over the manner in which
they convey their proxy advice to clients. See, e.g., CII IV: (''
[W]e would not object to the SEC permitting the proxy voting advice
businesses flexibility in the vehicle used to disseminate the
disclosures to clients if the Commission believes such flexibility
is appropriate to limit the competitive or other concerns that could
accompany the widespread distribution of the information.'').
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Similarly, 17 CFR 240.14a-2(b)(9)(i)(B) (``Rule 14a-
2(b)(9)(i)(B)''),\233\ which requires proxy voting advice businesses to
disclose ``any policies and procedures used to identify, as well as the
steps taken to address,'' any material conflicts of interest identified
pursuant to subsection (A), does not specify the extent to or manner in
which the required disclosure must be presented. As with the
disclosures required by subsection (A), proxy voting advice businesses
are given wide latitude to determine what information would best serve
their clients' interests. Moreover, Rule 14a-2(b)(9)(i) is not intended
to supplant or interfere with a business's course of practice and
standard operating procedures if it is already providing disclosure to
its clients sufficient to enable them to understand the business's
processes and methodology for identifying and addressing material
conflicts, as well as any measures taken in light of specific conflicts
identified. In addition, by giving proxy voting advice businesses the
flexibility to satisfy the principle-based requirement with their
existing methods of disclosure, we believe the costs of implementation
should not be unduly burdensome.\234\ Similarly, while the adoption of
Rule 14a-2(b)(9)(i) will create an expanded compliance obligation, we
do not believe it will have a detrimental effect on competition as the
flexibility afforded under the final rule should allow new businesses
to adapt the required disclosures to their specific business models and
thus avoid imposing a significant new barrier to entry for the proxy
voting advice business market.\235\
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\233\ Subsection (B) of Rule 14a-2(b)(9)(i) was proposed as
subsection (D), but has been re-designated in the final rule and is
otherwise adopted as proposed.
\234\ See supra note 197.
\235\ See supra note 203 and accompanying text.
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Contrary to the concerns expressed by some commenters about certain
implications of the proposed amendments,\236\ we note that Rule 14a-
2(b)(9)(i)(B) does not require proxy voting advice businesses to
include detailed compliance manuals in their proxy advice \237\ or
duplicative disclosures in both their proxy voting advice and in the
electronic medium used to deliver such advice regarding the businesses'
policies and procedures describing how they identify and address
conflicts.\238\ Provided the disclosure is conveyed either in its proxy
voting advice or in an electronic medium used to deliver the proxy
voting advice (such as a client voting platform), such that its client
is able to readily access the information as it reviews and considers
the voting advice, a proxy voting advice business has the discretion
under the rule to choose the solution it deems suitable for each
particular client. This may include, for example, a proxy voting advice
business providing an active hyperlink or ``click-through'' feature on
its platform allowing clients to quickly refer from the voting advice
to a more comprehensive description of the business's general policies
and procedures governing conflicts of interest.\239\
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\236\ See, e.g., letters from CII (``We believe such a provision
is overly broad and may in fact detract from the more important
conflict information currently provided by proxy advisors.''); Glass
Lewis. See also IAC Recommendation.
\237\ See, e.g., IAC Recommendation.
\238\ See, e.g., letter from Glass Lewis (expressing concern
that ``including a `discussion' of Glass Lewis' conflict policies
and procedures twice with each conflict disclosure,'' once in the
proxy voting advice report and again in the electronic medium used
to deliver such advice, ``would be wasteful and potentially obscure
the important information investors expect and would want to focus
on'').
\239\ Such hyperlinked description of the proxy voting advice
business's general policies and procedures governing conflicts of
interest could, for example, be maintained on the business's
publicly available website. See id. (``Glass Lewis has one set of
policies and procedures that describes how it identifies and
addresses conflicts, which it makes available on its website.'').
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More generally, we believe that increased transparency regarding a
proxy voting advice business's conflicts of interest may prompt a more
informed dialogue between such businesses and their clients. For
example, as a result of the increased transparency of a proxy voting
advice business's conflicts of interest, clients of the business,
including investment advisers, would be in a better position to
understand these conflicts and how they may affect the business's proxy
voting advice and other services. If this information improves the
ability of the proxy voting advice business's clients to identify the
kinds of information and details that would be valuable to them in
assessing the business's conflicts, this dialogue may also result in a
proxy voting advice business enhancing its approach to disclosure of
conflicts of interest in response. Such a dynamic regarding conflict
disclosure among investors (those who ultimately bear the costs and
benefits of voting), clients of proxy voting advice businesses, and
proxy voting advice businesses, each of which have different
incentives, may increase the benefits of the rule to the shareholder
voting process more generally.
C. Amendments to Rule 14a-2(b): Notice of Proxy Voting Advice and
Response
The ability of investors to make informed decisions, on the basis
of disclosure of material information, is a bedrock tenet on which the
federal securities laws were founded. This principle informs not only
our consideration of this rulemaking, but also, more broadly, the proxy
rules we administer \240\ and, as a more general matter, the
Commission's interest in the continued vitality, fairness, and
efficiency of our capital markets.\241\ Given the importance of the
shareholder proxy in today's markets,\242\ it is imperative that proxy
solicitations be conducted on a fair, honest, and informed basis.
Consistent with these
[[Page 55102]]
aims, and in light of the unique role played by proxy voting advice
businesses in many investors' voting decisions,\243\ it is important
that clients of these businesses, when making their voting decisions,
have access to transparent, accurate, and materially complete
information. We believe proxy voting is improved by robust discussion
among parties in advance of the voting decision, similar to the
vigorous engagement that may occur if all parties attended an annual or
special meeting in person.
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\240\ See, e.g., 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' . . . .'').
\241\ See supra notes 2-5 and accompanying text.
\242\ Id.
\243\ See Proposing Release at 10.
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As the Commission has noted, however, a number of commenters,
particularly within the registrant community, have expressed concern
about the current system for providing proxy voting advice under the
Commission's rules, and the resulting effect on the mix of information
available to shareholders, including the ability of shareholders to
benefit from robust discussion. While proxy voting advice businesses
can play an influential role in shareholders' proxy voting decisions,
the present proxy rules exempt them from the requirement to publicly
file their recommendations with the Commission, as registrants and
certain other soliciting parties must do for their own solicitations.
As a result, some commenters have expressed concern that registrants
lack an adequate opportunity to engage with and respond to influential
proxy voting advice before shareholders vote, potentially inhibiting
the accuracy, transparency, and completeness of the information
available to those making voting determinations.\244\ They also
highlight what they characterize as the limited ability to address any
deficiencies in proxy voting advice such as factual errors,
incompleteness, or methodological weaknesses that could materially
affect the reliability of proxy voting advice businesses' voting
recommendations and adversely impact voting outcomes.\245\
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\244\ See Proposing Release at 41-2.
\245\ See Proposing Release at 39, n. 94.
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1. Proposed Amendments
With the foregoing background in mind, the Commission proposed
review and response mechanisms for proxy voting advice, as discussed
below, that would apply any time proxy voting advice businesses provide
voting advice to their clients in reliance on either the Rule 14a-
2(b)(1) or (b)(3) exemptions from the proxy rules. By conditioning the
availability of these proposed exemptions in this way, the Commission
intended to (1) facilitate dialogue between proxy voting advice
businesses and registrants (and certain other soliciting persons, such
as dissident shareholders engaged in a proxy contest) before the
dissemination of proxy voting advice to clients of the proxy voting
advice business, when most shareholder votes have yet to be cast, and
(2) provide a means for registrants and certain other soliciting
persons to timely communicate their views about the advice to
shareholders, thereby assuring that the proxy voting advice businesses'
clients could consider this information along with any other data and
analysis they use to make their voting decisions. More generally, these
actions were intended to enhance transparency, accuracy, and
completeness.
a. Review of Proxy Voting Advice by Registrants and Other Soliciting
Persons
The Commission proposed new Rule 14a-2(b)(9)(ii) to require, as a
condition to the exemptions in Rules 14a-2(b)(1) and (b)(3), that a
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.\246\ This review and feedback period would be followed by a
final notice of voting advice, which would include any revisions to
such advice made by the proxy voting advice business as a result of the
review and feedback period, thereby allowing the registrant and/or
soliciting person time to determine whether to respond to the advice
before it is delivered to clients of the proxy voting advice
business.\247\ By providing a standardized opportunity for registrants
and certain other soliciting persons to review proxy voting advice
before it is finalized and delivered to clients of proxy voting advice
businesses, the Commission believed that these proposed amendments had
the potential to greatly improve the overall mix of information
available to the businesses' clients, who use proxy voting advice as an
important, often critical, element in formulating their voting
decisions.\248\
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\246\ See proposed Rule 14a-2(b)(9)(ii).
\247\ See proposed Rule 14a-2(b)(9)(ii)(B). Under the proposed
rules, this final notice would contain a copy of the proxy voting
advice that the proxy voting advice business would deliver to its
clients and be provided by the proxy voting advice business no later
than two business days prior to delivery of the proxy voting advice
to its client.
\248\ See Proposing Release at 44.
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To address concerns that allowing registrants or other soliciting
persons advance access to the proxy voting advice could result in
premature release of the advice to unauthorized and unintended parties,
the proposed rules specified that proxy voting advice businesses could
require that registrants and other soliciting persons agree to keep the
information confidential, and refrain from commenting publicly on it,
as a condition of receiving the proxy voting advice.\249\
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\249\ See Note 2 to paragraph (ii) of proposed Rule 14a-2(b)(9),
providing that the terms of such agreement 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.
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b. Response to Proxy Voting Advice by Registrants and Other Soliciting
Persons
In addition to the review and feedback mechanism, the Commission
proposed that registrants and certain other soliciting persons also be
given the option 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 (or other soliciting person, as applicable) that sets
forth its views on the advice.\250\ As proposed, registrants and other
eligible soliciting persons would be able to exercise this right by
notifying the proxy voting advice business no later than the expiration
of the minimum two-business day period corresponding to the final
notice of voting advice.\251\ If so requested, the proxy voting advice
business would then be required to include in its proxy voting advice
the relevant hyperlink or analogous electronic medium directing the
client to the registrant's or other soliciting person's respective
statement regarding the voting advice.\252\
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\250\ See proposed Rule 14a-2(b)(9)(iii). Consistent with the
proposed review and feedback process, the proposed right to request
inclusion of a statement would only have extended to registrants and
certain other soliciting persons (i.e., persons conducting non-
exempt solicitations). See id. (``If requested by the registrant or
any other person conducting a solicitation (other than a
solicitation exempt under Sec. 240.14a-2). . .'').
\251\ Id.
\252\ Id.
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In addition to the other proposed amendments to Rule 14a-2,
proposed 17 CFR 240.14a-2(b)(9)(iii) (``Rule 14a-2(b)(9)(iii)'') was
intended to enable those who rely on proxy voting advice,
[[Page 55103]]
whether for their own interests or on behalf of shareholders who have
entrusted them with proxy voting authority, to have information
available to them to effectively assess the recommendations provided by
proxy voting advice businesses and thereby make more informed voting
decisions.
2. Comments Received
a. Comments on Proposed Review of Proxy Voting Advice by Registrants
and Other Soliciting Persons
A number of commenters supported the proposed amendments and
asserted that the changes would improve the completeness, accuracy, and
reliability of the information underlying the voting advice,\253\ which
in turn would facilitate more informed decision-making by investors and
investment advisers.\254\ Many of these commenters stated that a review
and feedback mechanism was warranted to ameliorate the incidence of
errors, mistakes, and deficiencies in voting advice that they believe
exists.\255\ Several commenters also expressed the opinion that
registrants and other soliciting persons had been disadvantaged under
the existing system because very few were afforded the opportunity to
review proxy voting advice in advance \256\ or were given meaningful
opportunities to engage with proxy voting advice businesses to remedy
any perceived deficiencies they identified in voting advice.\257\
Commenters supporting the proposal also stated that even when
registrants do receive draft voting advice from proxy voting advice
businesses in advance of its publication, they typically are not given
sufficient time for a thorough review and response.\258\
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\253\ See, e.g., letters from BIO; BRT; CCMC; CEC; CGC;
ExxonMobil; Mark R. Allen, Executive Vice President, FedEx
Corporation (Feb. 3, 2020) (``FedEx''); GM; IBC; Nasdaq; SCG.
\254\ See, e.g., letters from BRT; CCMC; CEC (``The ability of
issuers to review and provided feedback on both draft and final
proxy reports prior to publication is an important step in
preserving the integrity of the proxy voting process. . . .''); NIRI
(``Overall, we believe the proposed rules . . . address and rectify
significant issues that have hindered investment advisers in making
informed determinations on investors' behalf.''); ExxonMobil; Mylan;
SCG; Bernard S. Sharfman, Chairman, Advisory Council, Main Street
Investors Coalition (Dec. 20, 2019) (``B. Sharfman I'') (asserting
that the proposed review process ``should be a good thing for
shareholders because the back and forth between the company and the
proxy advisor . . . should make each party better informed, allowing
them to make sure that factual errors and inadequate analytics are
not tainting their respective voting recommendations.'').
\255\ See, e.g., letters from ACCF (referring to its 2018 paper
exploring the analytical and methodological errors in proxy
advisors' recommendations: Are Proxy Advisors Really a Problem?);
ACCF II (referring to its 2020 paper, Are Proxy Advisors Still a
Problem?); BIO; BRT (``Business Roundtable has long been concerned
that proxy advisors produce reports that frequently include errors,
factually inaccurate information and incomplete analysis.''); CCMC
(citing ``frequent and significant errors in analysis and
methodology'' and a ``high incidence of factual and analytical
errors in proxy advisor reports.''); CEC; CGC (``[The proposal to
allow review of proxy voting advice] would help address one of the
biggest flaws of the current proxy advice system, which is the
tendency of proxy advisory firms to make egregious errors in vote
recommendations''); ExxonMobil; Garmin; NAM (asserting that ``Proxy
firm reports and recommendations feature a profusion of errors and
misleading statements''); Nareit; Nasdaq (``Factual errors have . .
. been identified by 95% of Business Roundtable members and `all
raise concerns regarding the rigor and integrity of the proxy
advisory firms' internal fact-collection and analysis processes' . .
. The ability to identify and correct errors is crucial for accuracy
and accountability.''); NIRI; SCG.
\256\ See, e.g., letters from CGC; CEC (``[T]he lack of any
reasonable access by all issuers--not just the largest issuers--to
draft and final proxy reports and the inability of those issuers to
adequately review both reports before publication is highly
problematic . . . . Providing all companies with the ability to
review the draft proxy report is an important step to ensuring the
integrity of the data within the proxy report.''); Richard R.
Dykhouse, Executive Vice President, General Counsel & Corporate
Secretary, Charter Communications, Inc. (Feb. 3, 2020)
(``Charter''); Penny Somer-Greif, Chair, and Gregory T. Lawrence,
Vice-Chair, Committee on Securities Law, Maryland Bar Association
(Feb. 3, 2020) (``MSBA''); Nareit; Nasdaq (describing current
opportunities available to registrants for review of draft proxy
voting advice as ``an uneven playing field''); NIRI.
\257\ See, e.g., letters from ACCF; BRT; CCMC; CEC; GM, Mylan;
NAM; Nareit; Nasdaq, NIRI; SCG.
\258\ See, e.g., letters from BRT (noting the limited window
that ISS allows for comment on draft reports that it provides to S&P
500 companies); CCMC; CEC; CGC; Charter; GM; NAM; Nasdaq; NIRI; SCG
(``ISS provides its reports to S&P 500 companies in advance and
takes comment on any factual errors in a 48-hour timeframe, although
companies are sometimes given less response time.''). In support of
their views on needed improvements to proxy voting advice, several
commenters cited the results of various surveys. See, e.g., letters
from ACCF; BRT; CCMC; Nareit; Nasdaq; SCG. But see, e.g., letters
from CII IV; Elliott I; Glass Lewis II; SWIB (questioning the rigor,
and therefore the usefulness, of such surveys).
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In many cases, commenters who supported the opportunity for advance
review provided by proposed Rule 14a-2(b)(9)(ii) disagreed with the
suggestion of other commenters that the proposal would compromise the
independence of proxy voting advice businesses, with some pointing to
the fact that a number of registrants were already participating in
advance review programs offered by proxy voting advice businesses.\259\
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\259\ See, e.g., letters from SCG (``It is difficult to
understand how, if ISS' voluntary review and comment processes do
not currently compromise the independence of their advice the
Proposed Rule's review and comment period for all public companies
would do so.''); BIO; ExxonMobil.
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Several commenters that were in favor of the proposal offered
suggested modifications intended to increase the rule's efficacy,\260\
such as giving registrants more time to review reports than was
proposed; \261\ explicitly including within the scope of the advanced
review process proxy voting advice based on custom policies \262\ and
mandating that proxy voting advice businesses make certain public
disclosures to enhance transparency (e.g., publishing proxy voting
advice following shareholder meetings).\263\
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\260\ See, e.g., letters from ExxonMobil; GM; MSBA; Nasdaq; SCC
I.
\261\ See, e.g., letters from BIO; BRT; Nasdaq.
\262\ See, e.g., letter from BRT (``The majority of our member
companies surveyed indicated that voting advice formulated under a
clients' custom policies should be subject to the proposed review
and feedback period. Member companies noted that the same need to
correct factual inaccuracies exists with these reports. . . .'').
But see, e.g., letters from CII IV; Heidi W. Hardin, Executive Vice
President and General Counsel, MFS Investment Management (Feb. 3,
2020) (``MFS Investment'') (stating that advice based on custom
policies should be excluded from the review framework as any
research provided by proxy voting advice businesses under the MFS
internal proxy voting is ``proprietary and commensurate with [MFS']
overall investment approach''); PIAC II.
\263\ See, e.g., letters from BRT (suggesting a requirement that
proxy voting advice businesses issue final reports tallying final
voting figures and comparing the results to the businesses' voting
recommendations to clients); SCC I (asserting that publication would
facilitate and encourage more public discussions about corporate
governance standards and permit more informed feedback about the
analyses and conclusions in company reports prepared by proxy voting
advice businesses).
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While many commenters supported the proposed review and feedback
provisions, a substantial number of commenters were opposed.\264\ Many
[[Page 55104]]
such commenters argued that there was an absence of compelling evidence
of frequent errors or significant deficiencies in proxy voting advice
to warrant such a requirement.\265\ Moreover, commenters emphasized
that the clients of proxy voting advice businesses generally have been
satisfied with the quality of the advice they receive.\266\ In support
of this view, commenters pointed to the absence of complaints from
clients of proxy voting advice businesses, as distinguished from the
large volume of complaints from registrants and their advocates.\267\
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\264\ See, e.g., letters from 62 Professors; AFL-CIO II; Sharon
Fay, Co-Head Equities, and Linda Giuliano, Head of Responsible
Investment, AllianceBernstein (Feb. 3, 2020)
(``AllianceBernstein''); Chelsea J. Linsley, Staff Attorney, and
Danielle Fugere, President & Chief Counsel, As You Sow (Feb. 3,
2020) (``As You Sow II''); Baillie Gifford; Dennis M. Kelleher,
President & CEO, et al., Better Markets, Inc. (Feb.3, 2020)
(``Better Markets''), David Sneyd, Vice President, Analyst,
Responsible Investment, BMO Global Asset Management (Jan. 31, 2020)
(``BMO''); Lauren Compere, Managing Director, Boston Common Asset
Management (Feb. 3, 2020) (``Boston Common'') (asserting that the
proposal would ``allow corporations to intercept recommendations
critical of the corporation or its management[, undermining] the
checks and balances necessary for functioning markets''); Amy D.
Augustine, Director of ESG Investing, and Timothy H. Smith, Director
of ESG Shareowner Engagement, Boston Trust Walden (Nov. 20, 2019)
(``Boston Trust''); Bricklayers; CalPERS (``While the release
suggests that the Proposed Rule is necessary to protect investors
from potentially incomplete or conflicted advice, the reality is
that there has been no investor demand for the Proposed Rule.'');
CalSTRS; CFA Institute I; CII IV; CIRCA (characterizing the proposed
review and feedback process as ``an unprecedented intrusion into
proxy voting''); Kevin E. McManus, Director of Proxy Services, Egan-
Jones Proxy Services (Feb. 3, 2020) (``Egan-Jones''); Glass Lewis
II; ICI; ISS; Cynthia M. Ruiz, Board President, Los Angeles City
Employees' Retirement System (LACERS) (Feb. 18, 2020) (``LACERS'');
MFS Investment; Scott M. Stringer, New York City Comptroller (Nov.
20, 2019) (``NYC Comptroller''); New York Comptroller II; Ohio
Public Retirement; Richard Stensrud, Executive Director, School
Employees Retirement System of Ohio (Jan. 30, 2020) (``Ohio School
Retirement''); Olshan Shareholder Activism Group (Feb. 3, 2020)
(``Olshan LLP''); PIAC II; PRI II; Seven Corners; Segal Marco II;
Amy M. O'Brien, Senior Managing Director, Head of Responsible
Investing, and Yves P. Denize, Senior Managing Director, Division
General Counsel, Teachers Insurance and Annuity Association of
America (TIAA) (Feb. 3, 2020) (``TIAA''); William J. Stromberg,
President and CEO, T. Rowe Price (Jan. 29, 2020) (``TRP''); Third
Point LLC (Feb. 3, 2020) (``Third Point LLC''); Jonas D. Kron,
Senior Vice President, Trillium Asset Management, LLC (Feb. 3, 2020)
(``Trillium''); ValueEdge I. See also IAC Recommendation.
\265\ See, e.g., letters from AFL-CIO II (``The Commission has
not made any showing of factual errors or methodological weaknesses
in proxy voting advice [that] need correction by companies before it
is distributed to clients.''); AllianceBernstein; As You Sow II
(``The Commission has failed to evidence any problem with the
current state of affairs. . .''); Better Markets; BMO; Bricklayers;
CalPERS; CalSTRS; CFA Institute I; CII IV (``[T]he paucity of
evidence of pervasive factual errors by proxy advisors suggests
that, in fact, no regulatory intervention is necessary or
justified.''); CIRCA; Glass Lewis II; Michael W. Frerichs, Illinois
State Treasurer (Jan. 16, 2020) (``Illinois Treasurer''); ISS; NYC
Comptroller; New York Comptroller II; Ohio Public Retirement; PERA;
PRI II; Jeffrey S. Davis, Executive Director, and Jason Malinowski,
Chief Investment Officer, Seattle City Employees' Retirement System
(SCERS) (Jan. 31, 2020) (``Seattle Retirement System''); Segal Marco
II; TIAA; Trillium; TRP; Third Point LLC; ValueEdge I. One commenter
also noted that at the Commission's 2018 Roundtable on the Proxy
Process, ``not one single participant . . . saw a need to impose
additional regulation on proxy advisers . . . .'' See letter from
ISS. See also IAC Recommendation.
\266\ See, e.g., letters from Better Markets (``There is little
evidence to support [the] claim [that the proposed changes are for
the benefit of investors] . . . . To the contrary, institutional
investors who manage trillions of dollars of Americans' savings and
retirement funds are urging the SEC not to proceed with the
misguided policies set forth in the Release.''); CalPERS (``It is
worth noting that no institutional investors have suggested that
[mandatory review periods for registrants] would enhance the
quality, quantity, or timeliness of advice.'').
\267\ See, e.g., letters from CalPERS (``[T]he reality is that
there has been no investor demand for the Proposed Rule. The push
for reforms in this area is not from investors who are obtaining the
advice . . . but instead is from the companies that are subjects of
the advice sought.'' . . . Existing clients have few complaints
about the quality of proxy voting advice . . . .'');ValueEdge I.
---------------------------------------------------------------------------
Commenters opposing the proposal also expressed their concern that
requiring advance review of proxy voting advice by registrants would
confer an unfair advantage to company management in disputed proxy
matters \268\ and would compromise the ability of proxy voting advice
businesses to provide disinterested, independent advice.\269\ Several
such commenters stated that giving registrants the priority to review
voting advice before the clients of proxy voting advice businesses was
incompatible with the Commission's own published views,\270\ as well as
the principle behind FINRA Rule 2241, which governs conflicts of
interest in connection with the publication of equity research reports
and public appearances by research analysts.\271\
---------------------------------------------------------------------------
\268\ See, e.g., letters from Olshan LLP; PRI II (asserting that
the proposal ``biases advice towards favoring managers, reducing the
accuracy and independence of proxy voting advice,'' because it
imposes costs only on recommendations that management opposes); SES
(expressing concern regarding the possibility that the right of
advance review creates information asymmetries favoring
registrants).
\269\ See, e.g., letters from AFL-CIO II; AllianceBernstein;
Baillie Gifford; CalPERS; CFA Institute I.; CII IV (`` [W]e believe
the proposed requirement will be reasonably perceived as impairing
the independence of the proxy advisor research, particularly since
the proxy advisor is required to seek review and receive feedback
from self-interested companies before sharing the draft report with
their own paying client . . . .''); MFS Investment; New York
Comptroller I; Ohio Public Retirement; PRI II; TRP.
\270\ See, e.g., letters from CII IV; ISS, New York Comptroller
II; Sanford Lewis, Director, Shareholder Rights Group (Feb. 3, 2020)
(``Shareholder Rights II''), referring to Communications Among
Shareholders Adopting Release at 48279. In that release, the
Commission stated: ``A regulatory scheme that inserted the
Commission staff and corporate management into every exchange and
conversation among shareholders, their advisors and other parties on
matters subject to a vote certainly would raise serious questions
under the free speech clause of the First Amendment, particularly
where no proxy authority is being solicited by such persons. This is
especially true where such intrusion is not necessary to achieve the
goals of the federal securities laws.'' [48279]
\271\ See, e.g., letters from AFL-CIO II; As You Sow II; BMO;
Boston Trust, CII IV; NYC Comptroller; New York Comptroller II; PIAC
II; TRP.
---------------------------------------------------------------------------
Some commenters were also concerned that the right of advance
review would increase the risk of insider trading of material, non-
public information \272\ and, more generally, expressed doubts about
the effectiveness of the proposal's framework for safeguarding the
confidentiality of materials provided by proxy voting advice businesses
to registrants.\273\ Along these lines, some commenters asked for
clarification about how the proposed confidentiality provision would
work in practice,\274\ and others suggested ways the provision and its
implementation could be improved, including by reconsidering the
duration of confidentiality and setting specific standardized
terms.\275\
---------------------------------------------------------------------------
\272\ See, e.g., letters from CII IV; ISS.
\273\ For example, some commenters thought the confidentiality
provision in Note 1 to proposed Rule 14a-2(b)(9)(ii) would be
unwieldy and exacerbate delays. See, e.g., letters from Baillie
Gifford; CalPERS; CCMC; Glass Lewis II; ISS; Olshan LLP (stating
that the proposals significantly underestimate the time and expense
of negotiating confidentiality agreements and providing detailed
reasons as to why the proposals would be so time consuming and
costly); SES (asserting that needing to sign individual
confidentiality agreements between every registrant and proxy voting
advice business would be cumbersome ``without any tangible
benefit''). See also letter from ExxonMobil (advocating in favor of
a ``simple and straightforward confidentiality notice with a
consent'' and against a ``complex or signed contractual agreement
[which] could undermine the review process or registrants' other
legal rights''). Other commenters were critical of the proposed
stipulation that any confidentiality agreements could be ``no more
restrictive than similar types of confidentiality agreements'' the
proxy voting advice business uses with its clients.'' These
commenters asserted that it was not feasible to use client
agreements as a model for the terms of confidentiality with
registrants. See, e.g., letters from Glass Lewis II; ISS.
\274\ See, e.g., letter from Baillie Gifford.
\275\ See, e.g., letters from CII IV (suggesting that more
consideration be given to the duration of confidentiality over proxy
voting advice businesses' proxy advice and the businesses' permitted
recourse when the terms of confidentiality are violated); Nasdaq
(asserting that ``standardizing and streamlining this process would
reduce legal costs and time spent negotiating each confidentiality
agreement and help ensure that such agreements contain standardized
restrictions and disclaimers'').
---------------------------------------------------------------------------
A substantial number of commenters opposed the proposed review and
feedback process on the grounds that it would significantly impede the
ability of proxy voting advice businesses to deliver timely and high
quality advice to their clients \276\ and, as a consequence, would
weaken the ability of their clients to thoughtfully consider the advice
and make informed decisions.\277\ Many such commenters were doubtful
that the proposed rules governing the advance review and feedback of
proxy advice was a viable framework \278\ and expressed concern
[[Page 55105]]
that it would create numerous logistical and practical challenges that
would be highly disruptive to the proxy voting system.\279\ Commenters
also noted the likelihood of significant costs associated with the
proposal that would be incurred by proxy voting advice businesses,
which many asserted would ultimately be borne by the businesses'
clients.\280\
---------------------------------------------------------------------------
\276\ See, e.g., letters from AFL-CIO II; As You Sow II; Baillie
Gifford; BMO; Boston Trust; CalPERS; CII IV; Elliott I; NYC
Comptroller (stating its view that under the proposed review and
feedback framework proxy voting advice businesses ``will have less
time to collect, verify, analyze and present data and provide their
research reports to clients well in advance of the annual
meeting''); New York Comptroller II; PIAC II; TIAA; TRP (asserting
that the time periods allotted for the review and feedback process
``have the very real potential to diminish the time needed for
registered investment advisers to fulfill essential fiduciary
obligations related to proxy voting'').
\277\ See, e.g., letters from As You Sow II; BMO; Bricklayers;
CalPERS; CII IV; PERA; TRP.
\278\ See, e.g., letters from CIRCA; Paul Schott Stevens,
President and CEO, Investment Company Institute (Feb. 3, 2020)
(``ICI'') (stating that the proposed framework ``would affect
substantially and adversely the timeliness and cost of proxy
advisory firms' advice, and thus its overall value to funds and
their shareholders''); Interfaith Center II; TRP (stating, among
other criticisms, that the review and feedback process would be
logistically impracticable and ``unworkable within the current time
constraints of the intensely seasonal proxy voting cycle'').
\279\ This included the impracticability of applying the rules
in the context of proxy contests or M&A transactions. See, e.g.,
letters from CII IV; Olshan LLP (providing detailed reasons why the
proposals would be challenging in proxy contests).
\280\ See, e.g., letters from 62 Professors; AFL-CIO II, Baillie
Gifford; BMO; Bricklayers; CalPERS; CFA Institute I; CII IV; Egan-
Jones; ICI; MFS Investment; NYC Comptroller; New York Comptroller
II; Ohio Public Retirement; Ohio School Retirement; Olshan LLP;
Segal Marco II; TIAA; Mark D. Epley, Executive Vice-President &
Managing Director, General Counsel, Managed Funds Association, and
Ji[rcaron][iacute] Kr[oacute]l, Deputy CEO, Global Head of
Government Affairs, Alternative Investment (Feb. 3, 2020) (``MFA &
AIMA'').
---------------------------------------------------------------------------
In addition to addressing practical challenges of the review and
feedback process, commenters identified a number of potential
unintended consequences that might result,\281\ including diminished
competition among proxy voting advice businesses,\282\ limitation of
market choice for consumers of proxy voting advice,\283\ reduction in
shareholder voting,\284\ and a decline in the utility of proxy voting
advice,\285\ which some commenters warned might be watered down to
lessen the risk of litigation \286\ and would be influenced by the
self-interested views of registrants before the advice was seen by
clients.\287\ Some commenters also raised the possibility that the
proposal was unconstitutional because it violated the right of free
speech under the First Amendment \288\ and the takings clause of the
Fifth Amendment.\289\
---------------------------------------------------------------------------
\281\ See, e.g., letters from 62 Professors; AFL-CIO II, Fran
Seegull (Feb. 2, 2020) (``Alliance''), As You Sow II, BMO,
Bricklayers; CalPERS, CFA Institute I; CII IV; Shawn T. Wooden,
Connecticut State Treasurer (Jan. 31, 2020) (``CT Treasurer'');
Egan-Jones; Elliott I; Diandra Soobiah, Head of Responsible
Investment, NEST--National Employment Savings Trust (Jan. 27, 2020)
(``Employment Savings''); Hermes; ISS; LA Retirement; MFA & AIMA;
New York Comptroller II; TIAA.
\282\ See, e.g., letters from 62 Professors; Baillie Gifford
(``It seems likely that the proposed amendments would be perceived
as onerous and deter new entrants to the proxy advisory industry'');
AFL-CIO II (``The additional burdens created by the proposed
regulations and increase in market concentration if smaller proxy
voting providers cannot stay in the business will significantly
increase costs for investors. By limiting competition and creating
barriers to entry, the Commission's proposed rulemaking is likely to
result in an even greater reliance by investors on Institutional
Shareholder Services and Glass Lewis''); BMO; Bricklayers; CalPERS,
CII IV (arguing that mandatory ``pre-review'' requirements will be
prohibitively costly for proxy voting advice businesses and
therefore ``likely to preclude new entrants, eliminate one or more
incumbents, and potentially lead any survivor to follow a business
model that includes providing consulting services to issuers,
compounding concerns on influencing of proxy advisor reports'');
Prof. Sergakis; TIAA.
\283\ See, e.g., letters from CII IV (noting that some of its
members switched from ISS to Glass Lewis because they believed ISS's
practice of providing some companies the right to pre-review reports
compromised the independence of the ISS analysis); Elliott I.
\284\ See, e.g., letters from Alliance, As You Sow II (``The
Proposed Rule may increase the liability of proxy advisory services,
or the perception of legal liability, causing proxy advisors to
decline to issue recommendations where issuers challenge findings,
thereby limiting the number of shareholders willing or able to
conduct their own research sufficient to vote for a shareholder
proposal''); BMO; CII IV.
\285\ See, e.g., letters from Bricklayers (stating that the
additional burdens imposed by the proposal ``would almost certainly
lead to . . . shrinking the overall market for proxy advisory
services . . . , the Proposed Amendments thus would burden
competition without serving the Exchange Act's purposes''); CalPERS;
CII IV; ICI; New York Comptroller II; MFA & AIMA.
\286\ See, e.g., letters from BMO (discussing its concern that
the proposal would ``significantly increas[e] the regulatory burden
on proxy advisers through increasing litigation risk); CalPERS (``We
recognize that the proxy advisors are not required to revise advice,
but a heavy hammer is placed over their heads by the added emphasis
on Rule 14a-9 liability . . . Although the Release states there is
no new private right of action created by the new Rule 14a-2(b)(9),
the process and greater focus on Rule 14a-9 will make it more likely
that proxy voting advice businesses will be sued under the new
rules.''); CFA Institute I (noting the possible consequence that
commentary from analysts, who might be encouraged to self-censor,
would be ``less forthright''); Ohio Public Retirement (questioning
whether Rule 14a-9 liability might be used ``to threaten or pressure
proxy advisory firms to incorporate issuer feedback or accept
revisions to their voting advice''); NYC Comptroller; PRI II.
\287\ See, e.g., letters from Baillie Gifford (``In relation to
the influence of registrants, allowing registrants to also comment
on analysis and dispute methodology and opinion, in conjunction with
the proposed anti-fraud amendments, could render proxy advisors
vulnerable to litigation if these matters are not incorporated into
the advice. This is clearly inappropriate as these matters are
necessarily subjective. This could result in the watering down of
advice to avoid potential actions, rendering the advice too bland to
be of use.''); Bricklayers (``Another potential negative impact of
the Proposed Amendments would be to advantage the viewpoints of
corporate management.'').
\288\ See, e.g., letters from CFA Institute I; CII IV (noting
the ``potential implications of the First Amendment on the
independence of the research reports of proxy advisors if subject to
required company review and feedback''); CIRCA (arguing that
establishing a mandatory registrant review process of proxy voting
advice would constitute an unconstitutional restraint on the speech
of proxy advisory firms''); Elliot; Glass Lewis II; ISS; Interfaith
Center II; New York Comptroller II; Mari C. Schwartzer, Director of
Shareholder Activism and Engagement, NorthStar Asset Management,
Inc. (Feb. 3, 2020) (``NorthStar''); Shareholder Rights II; Nell
Minow, Vice Chair, ValueEdge Advisors (Mar. 10, 2020) (``ValueEdge
III''); Washington State Investment. We discuss our response to
certain Constitutional objections to the proposed amendments in
Section II.C.3.d. infra.
\289\ See, e.g., letters from CalPERS (``Enabling a non-client
to review the work product before actual clients . . . arguably
violates the Constitution by taking private property for public use
without compensation''); ISS. We discuss our response to certain
Constitutional objections to the proposed amendments in Section
II.C.3.d. infra.
---------------------------------------------------------------------------
Many of the commenters who generally opposed the proposals also
offered suggested modifications to the extent that the Commission
elected to proceed to adoption of final rules.\290\ This included
shorter mandatory review periods provided to registrants,\291\ limiting
advance review to the factual information included in proxy voting
advice,\292\ allowing issuers to opt-in to the review and feedback
procedures,\293\ adjusting the timeline contemplated by the rule to
require that proxy statements be filed a certain number of days in
advance of the meeting in excess of what was proposed,\294\ concurrent
review by registrants and clients rather than advance review by
registrants,\295\ and other changes designed to make the review and
feedback process more cost-effective and efficient.\296\ In addition,
several commenters asked for more clarification with regard to certain
interpretive issues, including a more
[[Page 55106]]
precise understanding of which persons would be subject to the
rule.\297\
---------------------------------------------------------------------------
\290\ See, e.g., letters from AFL-CIO II; AllianceBernstein;
Baillie Gifford; BMO; CII IV; CIRCA; Elliott I; Glass Lewis II; ICI;
Illinois Treasurer; Interfaith Center II; MFS Investment; Ohio
Public Retirement; Olshan LLP; PIAC II; Seven Corners; TIAA. See
also IAC Recommendation.
\291\ See, e.g., letters from IAA; PIRC.
\292\ See, e.g., letters from Baillie Gifford; BMO; CII IV;
CIRCA; Elliott I; ICI; ISS; MFA & AIMA; Ohio Public Retirement. See
also IAC Recommendation.
\293\ See, e.g., letter from Glass Lewis II (asserting that this
would enable proxy voting advice businesses to collect important
information before the process begins, potentially reducing some of
the burden on the proxy voting advice businesses).
\294\ See, e.g., letters from CII IV (suggesting a timeline
requiring registrants to file 50 or more days prior to the annual
meeting; ICI; Interfaith Center II; ISS; Christopher Gerold,
President, North American Securities Administrators Association
(NASAA) (Feb. 3, 2020) (``NASAA''); TIAA.
\295\ See, e.g., letters from AllianceBernstein; Kevin A.
Beaugez (June 3, 2020) (``K. Beaugez''); BMO; James Allen, Head, and
Matt Orsagh, Director, Capital Markets Policy, CFA Institute (May
13, 2020) (``CFA Institute II''); CII IV; CIRCA; ICI; MFS
Investment; SES (stating that its business model is to provide its
voting advice report to clients and companies simultaneously 15 days
prior to the meeting, and then provide an addendum should any
corrections, changes, etc. be required). See also IAC
Recommendation. But see letter from Niels Holch, Executive Director,
Shareholder Communications Coalition (May 1, 2020) (``SCC II'')
(``The Coalition strongly opposes the concurrent review
recommendation.'').
\296\ See, e.g., letters from IAA (recommending that the
proposed review and feedback process be replaced with a single
review of the facts); ICI (recommending that proxy voting advice
businesses be permitted to provide a draft of their reports to
registrants and other soliciting persons for comment while
simultaneously publishing it for public review).
\297\ See, e.g., letters from AFL-CIO II; CII IV; Glass Lewis
II; ISS.
---------------------------------------------------------------------------
As an alternative to the proposed framework for review and
feedback, which they viewed as too rigid and prescriptive, some
commenters urged the Commission to consider a more flexible,
principles-based, and less intrusive solution.\298\ One commenter noted
that many of the practical concerns it expressed in its letter
regarding the proposed review and feedback mechanism ``could be
addressed by moving to a principles-based rule and using Commission or
Staff guidance to ensure that the mechanisms are being administered in
a fair and efficient manner.'' \299\ Several commenters also pointed
out that there already were existing mechanisms in place sufficient to
address the concerns raised in the Proposing Release, including
existing proxy voting advice business programs and policies for
registrants to provide feedback,\300\ antifraud liability under Rule
14a-9,\301\ and ``counter-speech'' measures for registrants (such as
filing additional proxy soliciting materials).\302\
---------------------------------------------------------------------------
\298\ See, e.g., letters from Baillie Gifford; Canadian Gov.
Coal; CII IV; Glass Lewis II; ISS; Prof. Sergakis (describing the
treatment of proxy voting advice businesses under the proposal as
too ``formalistic'' and stringent'' by comparison to the regulation
of such businesses in different parts of the world and recommending
a more flexible, principles-based system).
\299\ Glass Lewis II (``For example, the exemptive condition
could be as concise as a requirement that proxy advisors `maintain
policies and procedures that provide registrants (and certain other
soliciting persons) a meaningful opportunity to comment on proxy
advice and final notice of any proxy advice,' with Staff or
Commission guidance filling in the timing and other elements.'').
\300\ See, e.g., letters from Better Markets (``Both Glass Lewis
and ISS already have systems in place to allow companies to correct
factual errors in their reports and recommendations `and respond to
some aspect of their proxy voting advice' before they are sent to
their clients.''); BMO; CII IV; Glass Lewis II; Ohio Public
Retirement; Segal Marco II.
\301\ See, e.g., letters from AllianceBernstein; As You Sow II;
Better Markets; Elliott I; ISS; Glass Lewis II; CalPERS; CII IV; New
York Comptroller II; Segal Marco II; Seven Corners; Shareholder
Rights II. See also IAC Recommendation.
\302\ See, e.g., letters from AllianceBernstein; As You Sow II
(``Companies have the ability to make arguments in a variety of ways
including in their proxies, by calling investor meetings, or sending
out information to shareholders, among others. There is no reason to
afford issuers yet another avenue to provide their views, especially
when it is likely to dramatically interfere with what is already a
time-constrained and difficult process for proxy advisory firms and
shareholders''); Better Markets; CalPERS; CFA Institute I (noting
that ``registrants already have many opportunities to communicate
with investors,'' including the registrant's own proxy materials and
``the full array of social media avenues to reiterate and confirm
their positions . . .''); CII IV; Elliott I; Glass Lewis II; SS; New
York Comptroller II; PIAC II (``Issuers already provide their views
via proxy statements and other communications from management that
are easily accessible should they be needed. Giving companies the
opportunity for additional participation in the recommendations of
proxy advisors would detract from, rather than contribute to, the
objectivity of those recommendations.''); Segal Marco II; Seven
Corners; Shareholder Rights II. See also IAC Recommendation.
---------------------------------------------------------------------------
b. Comments on Proposed Response to Proxy Voting Advice by Registrants
and Other Soliciting Persons
A number of commenters supported the proposal as a means to improve
the overall mix of information available to investors.\303\ Commenters
argued that registrants do not have a timely and effective method for
conveying their views and assessments about proxy voting advice to
clients of proxy voting advice businesses before many clients vote in
reliance on such advice.\304\
---------------------------------------------------------------------------
\303\ See, e.g., letters from Baillie Gifford; BIO; Michele
Nellenbach, Director of Strategic Initiatives, Bipartisan Policy
Center (Feb. 3, 2020) (``BPC'') (stating that the hyperlink is a
cost-effective way to provide current information to investors),
BRT; CEC (``The Commission's proposed changes ensure investors will
have a full picture of the information from which they can then make
an informed, proposal-specific voting decision.''); CCMC; CEC; CGC;
ExxonMobil (``Timely access to both of these viewpoints [in the
proxy voting advice and the registrant's response to the advice]
each proxy season is critical for investors to make informed
decisions at minimal cost.''); FedEx; GM; NAM; Nareit; Nasdaq
(noting its belief that the hyperlink would improve the accuracy of
proxy voting advice and the overall mix of information available to
investors, especially given the lack of a requirement in the
proposed rules that proxy voting advice businesses revise their
recommendations based on registrant feedback); NIRI (``Shareholders
will be better informed as a result of the inclusion of [the
registrant's] response. Doing so will result in greater transparency
in the proxy voting advice process, allowing investors to see both
sides of the issue . . .''); SCG (asserting that ``factual errors
have frequently been found after the voting recommendation has been
disseminated'' and that ``the impact of additional proxy materials
can be limited''); TechNet.
\304\ See, e.g., letters from BRT; CEC (``The problems facing
issuers and the wider market occur due to the extreme difficulty in
engaging with proxy advisory firms during the proxy season and the
immediate and near irrecoverable impact the issuance of the proxy
report has on voting results''); Charter; ExxonMobil (``Timely
access to both of these viewpoints each proxy season is critical for
investors to make informed decisions at minimal cost. Our experience
is that supplemental proxy materials filed with the SEC after the
release of the proxy advisors' reports, which are intended to
supplement such reports, are ineffective.'').
---------------------------------------------------------------------------
Other commenters, however, opposed the proposal.\305\ A number of
these commenters raised concerns about costs and delays in the timely
receipt of advice that they asserted would result from the
proposal.\306\ Many commenters asserted the proposal is unnecessary
given the ability of registrants to conduct investor outreach and file
supplemental proxy materials to address any concerns with the voting
advice.\307\ Some commenters also objected on the grounds that the
proposed amendment was unconstitutional under the First Amendment.\308\
---------------------------------------------------------------------------
\305\ See, e.g., letters from AFL-CIO II; CII IV; Elliott I;
Glass Lewis II; ISS; Lars Dijkstra, Chief Investment Officer, and
Eszter Vitorino, Senior Responsible Investment Advisor, Kempen
Capital Management (Jan. 6, 2020) (``Kempen'') (asserting that such
requirement would be duplicative of the information already filed in
company proxy statements and meeting notices, adding burden without
additional value); New York Comptroller II; Ohio Public Retirement;
PERA; PRI II; Public Retirement Systems; ValueEdge III.
\306\ See, e.g., letter from CII IV (arguing that the proposed
requirement would delay the timely receipt of proxy voting advice
because proxy voting advice businesses will need to coordinate
timing of the filing of supplementary proxy materials with
registrants and that it would increase the businesses' direct costs
(e.g., costs to include a hyperlink in reports), which would likely
be passed on to clients and their beneficiaries).
\307\ See, e.g., letters from Glass Lewis II; Public Retirement
Systems.
\308\ See, e.g., letters from AFL-CIO II; CII IV; CIRCA; Elliott
I; Glass Lewis II (characterizing the proposed requirement for a
proxy voting advice business to publish a registrant's response to
proxy voting advice in the form of a hyperlink as compelled speech
and citing to legal precedent for the proposition that compelling a
party to publish or otherwise provide access to speech with which
the party may disagree violates the First Amendment); ISS (``Supreme
Court precedent is clear that the government may not `co-opt' a
person's speech `to deliver [a] message' from someone else.''); New
York Comptroller II. We discuss our response to certain
Constitutional objections to the proposed amendments in Section
II.C.3.d. infra.
---------------------------------------------------------------------------
Supporters and opponents of the proposal provided a variety of
suggested modifications to proposed Rule 14a-2(b)(9)(iii).\309\ For
example, some supporters recommended allowing registrants more time
than the proposed two business days in which to provide their statement
of response.\310\ Others were in favor of requiring proxy voting advice
businesses to include the full written statement of registrants in the
proxy advice, rather than just a hyperlink.\311\ Other commenters
requested that the Commission clarify certain points, such as whether a
proxy voting advice business would be subject to Rule 14a-9 liability
for omissions of a registrant's response,\312\ and whether it would be
a violation of an investment adviser's fiduciary duty if it chose not
to review a registrant's hyperlinked response.\313\ Because of concerns
that clients may not take the time to review registrants' hyperlinked
statements, commenters also recommended that the Commission require
proxy voting advice businesses to disable pre-populated voting
mechanisms or the automatic
[[Page 55107]]
submission of votes in instances where companies respond to a proxy
voting advice business's adverse voting recommendation, along the lines
of the alternative described in the Proposal.\314\
---------------------------------------------------------------------------
\309\ See, e.g., letters from BIO; ExxonMobil; Nasdaq; CII IV;
CFA Institute II; Hermes; ISS.
\310\ See, e.g., letter from BIO.
\311\ See, e.g., letters from BIO; NAM.
\312\ See letters from BRT; ExxonMobil.
\313\ See letter from Nasdaq.
\314\ See, e.g., letters from BIO (``Accordingly, [we] support
measures that would increase the likelihood that the registrant's
statement is taken into account, such as disabling the auto-
submission of votes when a registrant has submitted a response, or
disabling auto-submission unless the client accesses the
registrant's response or otherwise confirms the pre-populated voting
choices.''); BRT; CGC; ExxonMobil (asserting that the failure to
address automatic submissions would render the proposed rules
ineffective, with ``limited practical impact.''); NAM; Nareit; SCC
II.
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Some commenters who objected to the proposal nevertheless
recommended changes should the Commission adopt a response mechanism.
Several such commenters encouraged the Commission to codify the view
that a proxy voting advice business will not be held liable for the
content of a registrant's response, whether provided as a hyperlink or
included in the proxy statement in its entirety.\315\ Additional
suggestions included setting reasonable guidelines and limitations on
the content of a registrant's response,\316\ requiring that registrants
provide their hyperlink to the proxy voting advice business before the
end of the review period (not just request that it be included) to
ensure that the hyperlink is provided in a timely manner,\317\
requiring that the hyperlink be active when provided,\318\ and
permitting proxy voting advice businesses to require registrants to
indemnify them for any loss or claim arising out of the hyperlinked
content, its transmission, or use.\319\
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\315\ See, e.g., letters from Baillie Gifford; CII IV; Glass
Lewis II; ISS.
\316\ See, e.g., letter from Glass Lewis II.
\317\ Id.
\318\ Id.
\319\ Id.
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3. Final Amendments
a. Overview
Based on commenter feedback, we are adopting amendments to Rule
14a-2(b) that we believe achieve the important objectives of the
proposal but are modified in a number of respects to do so in a less
prescriptive, more principles-based manner. We recognize the practical
challenges faced by market participants--investors, registrants,
investment advisers, proxy voting advice businesses, and others--to
participate in, and fulfill their respective obligations in respect of,
the proxy process. To varying extents, market participants must convey,
assimilate, and give thoughtful consideration to relevant information
from various parties on a potentially wide range of topics in what is
generally viewed as a short time frame. In light of this, we believe a
more principles-based approach is appropriate.
As reflected in the large number of public comments received, there
is a wide range of opinions and competing views about the most
effective way to ensure that market participants, including users of
proxy voting advice, have access to adequate information when making
their voting decisions. Although some commenters argued that there was
insufficient evidence of inaccuracies or other problems with proxy
voting advice to justify regulation, and asserted that clients of proxy
voting advice businesses are satisfied with the quality of the advice
they receive, the proposed amendments were not motivated solely by the
Commission's interest in the factual accuracy of proxy voting advice.
As we explained in the Proposing Release, even where proxy voting
advice is not adverse to the registrant's recommendation or where there
are no errors in the advice, facilitating investor access to enhanced
discussion of proxy voting matters contributes to more informed proxy
voting decisions.\320\ Indeed, the principle that more complete and
robust information and discussion leads to more informed investor
decision-making, and therefore results in choices more closely aligned
with investors' interests, has shaped our federal securities laws since
their inception and is a principal factor in the Commission's adoption
of these amendments. Regardless of the incidence of errors in proxy
voting advice, we believe it is appropriate to adopt reasonable
measures designed to promote the reliability and completeness of
information available to investors and those acting on their behalf at
the time they make voting determinations. In particular, we reiterate
the far-reaching implications that proxy voting advice can have in the
market \321\ and accordingly continue to believe that measured changes
designed to facilitate more complete and robust dialogue and
information sharing among proxy voting advice businesses, their
clients, and registrants would improve the proxy voting system, and
ultimately lead to more informed decision-making, to the benefit of all
participants, including shareholders that do not use proxy voting
advice and yet may be affected by the recommendations of proxy voting
advice businesses. We also believe that such measured changes, while
not an exact substitution, would more closely approximate the
discussion that could occur at a meeting with physical attendance and
participation by shareholders and other parties. We therefore believe
that ensuring that registrants have timely notice of proxy voting
advice and that proxy voting advice businesses provide clients with a
mechanism by which they can reasonably be expected to become aware of
any written response by registrants to that advice--in a timely
manner--will increase confidence across participants in the proxy
system that clients of proxy voting advice businesses, whether those
clients are investors or are acting on behalf of investors, have timely
access to transparent, accurate, and complete information material to
their voting decisions.
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\320\ See Proposing Release at 66530.
\321\ See supra notes 51-53 and accompanying text.
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The Commission is aware of the risk that introducing new rules into
a complex system like proxy voting, which has evolved over many years
in response to changes in the marketplace as well as the interests and
needs of market participants, could inadvertently disrupt the system
and impose unnecessary costs if not carefully calibrated. For example,
we understand the timing pressures and logistical challenges faced by
shareholders, investment advisers, registrants, and, as a result, proxy
voting advice businesses and their clients, particularly during the
peak of proxy season.\322\ We also acknowledge the concerns expressed
by a number of commenters that the adoption of an overly prescriptive
framework governing aspects of the proxy voting advice system could,
depending on various facts and circumstances, impede the ability of
proxy voting advice businesses to provide their clients with timely
voting advice.\323\ Ultimately, we are guided by the principle that
informed decision-making by shareholders is the foundation on which the
legitimacy of the proxy voting system rests \324\ and believe that a
well-functioning proxy system benefits from the ability of clients of
proxy voting advice businesses to obtain more complete information on
which to base their voting decisions.\325\
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\322\ See Proposing Release at 52, n. 134.
\323\ See, e.g., letters from Baillie Gifford; Canadian Gov.
Coal; CII IV; Glass Lewis II; ISS; Prof. Sergakis.
\324\ See supra notes 2-5 and accompanying text.
\325\ This is consistent with the Commission's views regarding
steps an investment adviser could take when it retains a proxy
voting advice business and it becomes aware of potential factual
errors, potential incompleteness, or potential methodological
weaknesses in the proxy voting advice business's analysis that may
materially affect one or more of the investment adviser's voting
determinations. See Commission Guidance on Proxy Voting
Responsibilities at 21-22 (``In reviewing its use of a proxy
advisory firm, an investment adviser should also consider the
effectiveness of the proxy advisory firm's policies and procedures
for obtaining current and accurate information relevant to matters
included in its research and on which it makes voting
recommendations . . . As part of this assessment, investment
advisers should consider . . . [t]he proxy advisory firm's
engagement with issuers, including the firm's process for ensuring
that it has complete and accurate information about the issuer and
each particular matter, and the firm's process, if any, for
investment advisers to access the issuer's views about the firm's
voting recommendations in a timely and efficient manner. . . .'').
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[[Page 55108]]
As noted above, some commenters asserted that certain existing
mechanisms in the proxy system suffice to address the concerns raised
in the Proposing Release and obviate the need for the proposed
rules.\326\ Those mechanisms include proxy voting advice businesses'
existing programs and policies for registrants to provide feedback,
``counter-speech'' measures already available to registrants (e.g.,
filing supplemental proxy materials), and antifraud liability under
Rule 14a-9.\327\ Contrary to the views of those commenters, however, we
do not believe that those mechanisms, as currently implemented, suffice
to achieve our goal of ensuring that clients of proxy voting advice
businesses have timely access to a more complete mix of relevant
information and exchange of views. Although it is encouraging that some
proxy voting advice businesses have programs in place pursuant to which
some registrants have the opportunity to review and provide feedback on
or responses to proxy voting advice, those programs have not been
universally adopted by proxy voting advice businesses and do not
uniformly provide registrants (and their investors) with the same
opportunities for (and benefits of) review, feedback, and
response.\328\
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\326\ See supra notes 300-302 and accompanying text.
\327\ See, e.g., letters from AllianceBernstein; As You Sow II;
Better Markets; Elliott I; ISS; Glass Lewis II; CalPERS; CII IV; New
York Comptroller II; Segal Marco II; Seven Corners; Shareholder
Rights II. See also IAC Recommendation.
\328\ See supra notes 256-258 and accompanying text; Proposing
Release at 66529-30 (``[S]ome 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.'').
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As to ``counter-speech'' measures, under current market practices
registrants are not systematically informed of proxy voting advice in a
timely manner such that they can provide investors a response to such
advice, let alone a response sufficiently in advance of the relevant
meeting to allow investors to consider the response prior to casting
their vote.\329\ In addition, while the potential for liability under
Rule 14a-9 helps to ensure that proxy voting advice is not materially
false or misleading, it does not address the need for investors to have
timely access to transparent, accurate, and complete information--
including any written response by the registrant to the advice--that is
material to their voting determinations.\330\
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\329\ See Proposing Release at 66533 (``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.'').
\330\ Id. at 66530 (noting that ``[t]he registrant . . . 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,'' the communication of
which ``could improve the overall mix of information available when
the clients make their voting decisions'').
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As we explained in the Proposing Release, under existing
mechanisms, it can be difficult to ensure that those making voting
decisions have timely access to materially complete information prior
to voting.\331\ Without notice of the proxy voting advice business's
recommendations, registrants are often unable to provide a response
prior to votes being cast. Also, given the high incidence of voting
that takes place very shortly after a proxy voting advice business's
advice is distributed to its clients, without a mechanism by which
clients can reasonably be expected to become aware of any response in a
timely manner (as they and other investors would if the discussion were
taking place at a meeting where shareholders are physically attending
and participating), votes may be cast on less complete information.
Because proxy voting advice businesses have control over the timing of
the dissemination of their proxy voting advice, we believe they are the
best-positioned parties in the proxy system to both (1) make their
proxy voting advice available to registrants and (2) provide clients
with a mechanism by which they can reasonably be expected to become
aware of a registrant's written response to their proxy voting advice
in a timely manner.
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\331\ Id. at 66528-30.
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Although we do not believe the existing voluntary forms of outreach
to registrants and other market participants discussed above are alone
sufficient, we have carefully considered the views of a number of
commenters, including the two largest proxy voting advice businesses.
Those commenters indicated that a more principles-based approach would
be appropriate and one of whom specifically indicated that such an
approach would achieve the Commission's goals while avoiding many of
the complexities and practical concerns arising from the approach taken
in the proposal.\332\ We agree and are therefore adopting amendments
that articulate a set of principles, distilled from the proposed rules,
upon which a proxy voting advice business may design its own policies
and procedures. We believe this approach will provide proxy voting
advice businesses the flexibility to satisfy their compliance
obligations in a customized and cost-effective manner and avoid
exacerbating the challenges posed by timing and logistical
constraints,\333\ while achieving the objective of ensuring that proxy
voting advice businesses' clients have timely access to more
transparent, accurate, and complete information upon which to base
voting decisions. We believe such an approach addresses a number of
concerns raised by commenters, is better equipped to fit the needs of
participants in the proxy voting process, and will be adaptable as
circumstances change.
---------------------------------------------------------------------------
\332\ See supra notes 298-299 and accompanying text.
\333\ See Proposing Release at 52, n. 135.
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b. Policies and Procedures To Facilitate Informed Decision-Making by
Clients of Proxy Voting Advice Businesses [Rule 14a-2(b)(9)(ii)]
Consistent with the discussion above, we are adopting new Rule 14a-
2(b)(9)(ii) to require, as a separate condition to the availability of
the exemptions in Rules 14a-2(b)(1) and (b)(3), that a proxy voting
advice business \334\ adopt and publicly disclose
[[Page 55109]]
written policies and procedures reasonably designed to ensure that:
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\334\ As adopted, Rule 14a-2(b)(9) defines ``proxy voting advice
business'' as ``a person furnishing proxy voting advice covered by
Sec. 240.14a-1(l)(1)(iii)(A).'' Some commenters opposed the use of
this term. See letters from ISS (stating generally with respect to
proposed Rule 14a-9 that the Commission should refer to entities
subject to the rules as ``proxy advisers'' or ``proxy advisory
firms,'' rather than creating a new term (``proxy voting advice
business'')); CII IV (asserting that there is no evidence that the
current terminology is inadequate). While we acknowledge commenters'
concern about introducing a new term to the proxy rules, we believe
that it is appropriate to clarify the type of proxy voting advice
that the new rules are intended to address and accordingly scope in
businesses that provide such advice, rather than basing application
of the rules on the types of businesses that currently provide such
services. We believe this avoids inadvertently scoping in other
services that such businesses may provide, and also provides
flexibility for the rule to address future business models that may
involve the type of advice the rules are intended to address.
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(A) Registrants that are the subject of proxy voting advice have
such advice made available to them at or prior to the time when such
advice is disseminated to the proxy voting advice business's clients;
\335\ and
---------------------------------------------------------------------------
\335\ Rule 14a-2(b)(9)(ii)(A).
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(B) The proxy voting advice business provides its clients with a
mechanism by which they can reasonably be expected to become aware of
any written statements regarding its proxy voting advice by registrants
that are the subject of such advice, in a timely manner before the
shareholder meeting (or, if no meeting, before the votes, consents, or
authorizations may be used to effect the proposed action).\336\
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\336\ Rule 14a-2(b)(9)(ii)(B). See infra Section II.C.3.c. for a
discussion of Rules 14a-2(b)(9)(v) and (vi), which exclude certain
types of proxy voting advice from the application of Rule 14a-
2(b)(9)(ii).
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While we appreciate the input of commenters that recommended we
adopt the more prescriptive requirements of the proposed rule with
modifications,\337\ we believe that the objectives of the rule are
better achieved through a principles-based requirement that is firmly
rooted in our historic and proven disclosure framework and will provide
proxy voting advice businesses with the ability to tailor their
policies and procedures to ensure compliance with the requirements on a
basis that is efficient and best serves the evolving needs of their
clients and the practical realities of their individual business
models.
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\337\ See, e.g., letters from BRT; Exxon Mobil; GM; MFA & AIMA;
MSBA; Nasdaq; Scott Hirst, Assoc. Prof., Boston University Law
School (Feb. 3, 2020) (``Prof. Hirst''); Representatives Bryan
Steil, et al., U.S. House of Representatives (Jan. 6, 2020) (``Rep.
Steil''); SCC I.
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i. Notice to Registrants and Safe Harbor
Paragraph (A) of Rule 14a-2(b)(9)(ii) reflects the Commission's
judgment that effective engagement between proxy voting advice
businesses and registrants, in which registrants are timely informed of
proxy voting advice that bears on the solicitation of their
shareholders, will further the goal of ensuring that proxy voting
advice businesses' clients have more complete, accurate, and
transparent information to consider when making their voting decisions.
This will, by extension, benefit the shareholders on whose behalf those
clients may be voting.
As adopted, 17 CFR 240.a-2(b)(9)(ii)(A) (``Rule 14a-
2(b)(9)(ii)(A)'') does not dictate the manner or specific timing in
which proxy voting advice businesses interact with registrants, and
instead leaves it within the discretion of the proxy voting advice
business to choose how best to implement the principles embodied in the
rule and incorporate them into the business's policies and procedures.
The rule does not require that proxy voting advice businesses provide
registrants or other soliciting persons \338\ with the opportunity to
review proxy voting advice in advance of its dissemination to the
businesses' clients, although providing registrants with the
opportunity to review their proxy voting advice in advance would
satisfy the principle and is encouraged to the extent feasible.\339\
The rule requires that proxy voting advice businesses must have adopted
and publicly \340\ disclosed policies and procedures reasonably
designed to ensure that proxy voting advice \341\ is made available to
registrants ``at or prior to the time when such advice is disseminated
to the proxy voting advice business's clients.'' \342\ The rule does
not, however, require proxy voting advice businesses to ensure that
proxy voting advice be made available to registrants after being
initially provided to clients, if it is later revised or updated in
light of subsequent events, as we recognize that
[[Page 55110]]
such a requirement could be unduly burdensome given the timing
constraints of the proxy process. We believe the final rules continue
to advance the Commission's interest in improving the mix of
information available to shareholders in a manner that is compatible
with the complex and time-sensitive proxy voting advice infrastructure
that currently exists and, in particular, the proxy voting advice
businesses that many shareholders or those acting on their behalf use
in connection with proxy voting, including meeting their voting
obligations to investors.
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\338\ We believe that it could have been unduly burdensome on
proxy voting advice businesses to extend the requirements of Rule
14a-2(b)(9)(ii)(A) to other soliciting persons (in addition to the
relevant registrants). We are mindful of the costs and potential
logistical complications that could arise if a proxy voting advice
business were required to ensure that multiple soliciting persons
were informed of its proxy voting advice in a timely manner.
Notwithstanding such costs and potential complications, proxy voting
advice businesses may structure their policies and procedures to
inform other soliciting persons of their proxy voting advice if they
wish to do so. Further, as we noted in the Proposing Release,
neither shareholder proponents nor persons conducting exempt
solicitations are required to file substantive disclosure documents
with the Commission or to make public statements. Proposing Release
at 66532. Because such disclosure documents and public statements
generally contain substantive information that likely would form the
basis of proxy voting advice businesses' analyses, there may be an
information asymmetry as to proxy voting advice provided with
respect to registrants' solicitations as compared to shareholder
proponents' or exempt solicitations. Consistent therewith, we stated
in the Proposing Release that proxy voting advice businesses would
be required to extend the proposed 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. Id. However, as
discussed below (see infra Section II.C.3.c.ii.), we are adopting
Rule 14a-2(b)(9)(vi) that, in part, excludes from the requirements
of Rule 14a-2(b)(9)(ii) the portions of the proxy voting advice that
relate to solicitations regarding contested matters, regardless of
who is making such solicitation. See Rule 14a-2(b)(9)(vi).
\339\ As noted above, we understand that certain proxy voting
advice businesses currently provide at least some issuers with the
opportunity to review and respond to their proxy voting advice in
advance of its dissemination to their clients. See Proposing Release
at 66529 (``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. Glass Lewis has a program that allows registrants who
participate to receive a data-only version of its voting advice
before publication to clients.''). Although such advance review
opportunity is not required by Rule 14a-2(b)(ii), we encourage proxy
voting advice businesses that are currently providing registrants
with this opportunity to continue doing so as it furthers the
objectives of this rule.
\340\ The requirement that such policies and procedures be
``publicly'' disclosed would be satisfied if, for example, they were
publicly available on a proxy voting advice business's website. This
is consistent with the approach that at least some proxy voting
advice businesses are currently taking with respect to the
opportunities they provide registrants to review their proxy voting
advice. See, e.g., Glass Lewis, Report Feedback Statement (last
visited June 11, 2020), available at https://www.glasslewis.com/report-feedback-statement/; ISS, ISS Draft Review Process for U.S.
Issuers (last visited June 11, 2020), available at https://www.issgovernance.com/iss-draft-review-process-u-s-issuers/. Given
the flexibility that proxy voting advice businesses have with
respect to the method by which they satisfy the principle set forth
in Rule 14a-2(b)(9)(ii)(A), we believe that the public disclosure of
such policies and procedures is critical to ensuring that
registrants understand how they can become informed of the relevant
proxy voting advice. We also believe that the transparency created
by such public disclosure may yield ancillary benefits, including
increased assurance of compliance by proxy voting advice businesses
with Rule 14a-2(b)(9)(ii).
\341\ See supra note 7 for the definition of ``proxy voting
advice'' as used in this release.
\342\ Rule 14a-2(b)(9)(ii)(A). The goal of the principle is to
provide registrants with enough time to respond to the proxy voting
advice, should they choose to, sufficiently in advance of investors
casting their final votes. Practically speaking, the most efficient
way for proxy voting advice businesses to achieve this goal is to
disseminate the reports containing their proxy voting advice to
registrants (or otherwise provide registrants with access to such
reports) either at the same time or before they disseminate such
reports to their clients. We recognize that some commenters that
supported the proposed rules indicated that even when registrants do
have the opportunity to review proxy voting advice in advance, they
do not have sufficient time for a thorough review and response. See
supra note 258 and accompanying text. Although the proposed advanced
review and feedback process likely would have afforded registrants
more lead time to review and respond to proxy voting advice, we are
conscious of the corresponding costs that other commenters
identified. See infra notes 351-355 and accompanying text. We
further note that even if some clients of proxy voting advice
businesses make their voting decision after receiving such
businesses' recommendations but before the registrant has had the
opportunity to respond thereto, those clients retain the ability to
change their vote prior to the meeting date. Under the final rules,
therefore, registrants should have the opportunity to respond to
proxy voting advice sufficiently in advance of the meeting date.
Accordingly, clients of proxy voting advice businesses are more
likely to become aware of a registrant's response pursuant to Rule
14a-2(b)(9)(ii)(B) and should have the opportunity to consider
whether to adjust their votes based thereon. See infra note 387 and
accompanying text.
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In addition, paragraph (iii) of Rule 14a-2(b)(9) includes a non-
exclusive safe harbor provision that, if followed, will give assurance
to a proxy voting advice business that it has met the principles-based
requirement of new Rule 14a-2(b)(9)(ii)(A). In accordance with this
safe harbor, a proxy voting advice business will be deemed to satisfy
Rule 14a-2(b)(9)(ii)(A) if it has written policies and procedures that
are reasonably designed to provide registrants with a copy of its proxy
voting advice, at no charge, no later than the time it is disseminated
to the business's clients.\343\ Such policies and procedures may
include conditions requiring that such registrants have:
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\343\ Rule 14a-2(b)(9)(iii).
---------------------------------------------------------------------------
(A) Filed their definitive proxy statement at least 40 calendar
days before the shareholder meeting; \344\ and
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\344\ Rule 14a-2(b)(9)(iii)(A). Where the registrant is
soliciting written consents or authorizations from shareholders for
an action in lieu of a meeting, a proxy voting advice business's
written policies and procedures may require that the registrant must
file its definitive soliciting materials at least 40 calendar days
before the action is effective in order to receive a copy of its
proxy voting advice.
---------------------------------------------------------------------------
(B) Expressly acknowledged that they will only use the proxy voting
advice for their internal purposes and/or in connection with the
solicitation and it will not be published or otherwise shared except
with the registrant's employees or advisers.\345\
---------------------------------------------------------------------------
\345\ Rule 14a-2(b)(9)(iii)(B).
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Under this safe harbor, the proxy voting advice business may
structure its written policy however it wishes so long as the policy
has been reasonably designed to provide \346\ any registrant that meets
the conditions of (A) and (B) above with a copy of the business's proxy
voting advice with respect to that registrant at least concurrently
with the delivery of such advice to its clients.\347\
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\346\ In terms of the method by which a proxy voting advice
business provides a copy of its advice to a registrant, it could do
so by, for example, sending the registrant an email either attaching
an electronic copy of the relevant report or including an active
hyperlink to the report.
\347\ Under the terms of the safe harbor, registrants are not
required to reimburse proxy voting advice businesses for the cost of
providing a copy of the proxy voting advice. See Rule 14a-
2(b)(9)(iii). While some commenters favored a requirement that
registrants reimburse proxy voting advice businesses for reasonable
expenses associated with the proposed review and feedback period
(see letters from CII IV; New York Comptroller II), others asserted
that proxy voting advice businesses should not be able to seek
reimbursement from registrants for the costs to provide their
reports (see letters from Exxon Mobil; GM; NAM; SCG). For purposes
of the safe harbor, we believe that the benefit to investors of more
timely, complete, and reliable information upon which to make
informed voting decisions should not be lessened by making a
registrant's ability to review proxy voting advice dependent on the
registrant's willingness to pay for it. See infra note 412 for our
discussion of how the final rules address certain comments we
received on the proposed rules expressing concern regarding the
takings clause of the Fifth Amendment.
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We believe the 40 calendar-day aspect of the safe harbor \348\
affords the proxy voting advice business a reasonable amount of time to
provide the advisory materials to registrants, without adversely
affecting the business's ability to provide timely voting advice to its
clients. 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 and
are subject to time pressure to deliver their research and analysis to
their clients sufficiently in advance of the shareholder meeting.\349\
Accordingly, we do not believe that it would be practicable to impose
additional administrative and logistical burdens on proxy voting advice
businesses in cases in which registrants' definitive proxy statements
are filed closer to the date of the shareholder meeting.\350\ However,
if they wish to do so, proxy voting advice businesses may structure
their policies to accommodate registrants that may file less than 40
calendar days before the shareholder meeting and remain within the safe
harbor.
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\348\ Rule 14a-2(b)(9)(iii)(A).
\349\ See e.g., letters from CII IV; Glass Lewis II; ISS
(describing the timing and processes involved in the preparation and
delivery of their proxy voting advice to clients). See also
Proposing Release at 66531, n. 119.
\350\ Based on the information we received from commenters, it
is our understanding that 40 calendar days prior to the shareholder
meeting is well within the customary range when definitive proxy
statements are filed. See e.g., letters from CII IV; Glass Lewis II.
By comparison, we note that the Commission's proposal would have
required proxy voting advice businesses to provide registrants with
an opportunity for advance review and feedback of the proxy voting
advice if the registrant filed its definitive proxy statement at
least 25 calendar days before the shareholder meeting. See proposed
Rule 14a-2(b)(2)(9)(ii); Proposing Release at 66531. We also note
that such 40 calendar day-period exceeds the minimum number of days
that some proxy voting advice businesses currently require that
registrants file their definitive proxy statements prior to the
shareholder meeting in order to review at least a portion of their
proxy voting advice in advance of its dissemination. See, e.g.,
Glass Lewis, Issuer Data Report (last visited June 11, 2020),
available at https://www.glasslewis.com/issuer-data-report/ (noting
that in order for a registrant to review an issuer data report in
advance of the proxy voting advice being disseminated to clients,
registrants must ``disclose their meeting documents at least 30 days
in advance of their meeting date''); ISS, ISS Draft Review Process
for U.S. Issuers (last visited June 11, 2020), available at https://www.issgovernance.com/iss-draft-review-process-u-s-issuers/ (``To
ensure timely delivery of our analyses to our clients, we cannot
provide a draft to any company that files its definitive proxy less
than 30 days before its meeting.'').
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The concurrent dissemination of proxy voting advice to clients and
registrants specified in the safe harbor addresses concerns expressed
by commenters that the proposed review mechanism, which would have
allowed registrants to review and provide feedback on voting advice
before distribution to the clients of proxy voting advice businesses,
could have undermined the ability of proxy voting advice businesses to
provide impartial advice to their clients,\351\ increased the risk of
insider trading of material non-public information,\352\ and impinged
on proxy voting advice businesses' rights of free speech.\353\ As
discussed above, several commenters objected on the grounds that
permitting registrants to review and comment on draft proxy voting
advice in advance of a proxy voting advice business's clients would
interfere in shareholders' communications with their advisors on
matters subject to a vote.\354\ In particular, some commenters argued
that the review process, as proposed, gave preferential treatment to
registrants over a proxy voting advice business's
[[Page 55111]]
own clients and would tend to promote management's interests because it
allowed registrants to influence the content of advice at a critical
stage of its production without granting similar access to
shareholders.\355\
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\351\ See supra note 269. We believe that the concurrent
dissemination of proxy voting advice to clients and registrants
pursuant to the safe harbor will achieve the objectives of this
rulemaking and address commenters' concerns regarding a registrant's
practical ability to review, consider, and respond to proxy voting
advice. See supra note 342.
\352\ See supra note 272. Proxy voting advice may, depending on
the facts and circumstances, constitute material, non-public
information. We expect proxy voting advice businesses, their
clients, and registrants receiving non-public information in this
process to take reasonable measures to safeguard any material, non-
public information in their possession by, for example, adopting and
implementing effective policies and procedures to ensure that its
use and dissemination is consistent with applicable law. See also
infra note 400; Institutional S'holder Servs. Inc., Release No. IA-
3611, 106 SEC. Docket 1681, 2013 WL 11113059, at *5 (May 23, 2013)
(``In this case, ISS violated Section 204A [of the Advisers Act]
because it failed to establish and enforce policies and procedures
reasonably designed to prevent the misuse of ISS' shareholder
advisory clients' material, nonpublic proxy voting information.'').
\353\ See supra note 288.
\354\ See supra notes 276-277.
\355\ See supra note 268.
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Several commenters who were opposed to the concept of advance
review suggested concurrent review as a preferable alternative.\356\ In
the view of such commenters, a concurrent review would provide
registrants with access to proxy voting advice, but it would be on an
equal footing with the clients of proxy voting advice businesses and
therefore would avoid many of the potential adverse consequences that
commenters associated with mandating an opportunity for registrants'
advance review.\357\ We agree with this approach and believe that, for
example, the receipt of a copy of proxy voting advice by a registrant
who is the subject of such advice no later than the date upon which it
is distributed to the proxy voting advice business's clients would
bring about many of the same benefits for which the proposed registrant
review was intended, particularly in conjunction with (1) a
registrant's ability to file additional soliciting materials to
communicate their views regarding the advice to shareholders and (2)
the new requirement, described below,\358\ that proxy voting advice
businesses adopt written policies and procedures reasonably designed to
ensure that they provide clients with a mechanism by which they can
become aware of a registrant's statements of its views about such
advice in a timely manner.
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\356\ See supra note 295.
\357\ Id.
\358\ See infra Section II.C.3.b.ii.
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Under the proposed rules, a proxy voting advice business would have
been able to require registrants to enter into confidentiality
agreements for materials provided during the proposed review and
feedback period as a condition of receiving the proxy voting advice on
terms ``no more restrictive'' than similar types of confidentiality
agreements the business has with its clients, which would cease to
apply once the business released its proxy reports to clients.\359\
Some commenters suggested this formulation would be unworkable in
practice because the confidentiality agreements used with clients were
not comparable and therefore would not be a suitable template.\360\ In
addition, commenters objected to the mandated cessation of the
registrant's confidentiality agreement, as the risk of harm that would
be suffered by the proxy voting advice business due to misuse of its
confidential information could continue well into the future.\361\
Moreover, a number of commenters expressed concern that requiring
confidentiality agreements between proxy voting advice businesses and
registrants would necessitate the parties' negotiation over contractual
terms, an additional complication that could mire the proposed review
and feedback process, and therefore the timely provision of voting
advice to shareholders, in unmanageable delays.\362\ Some commenters
also noted that such negotiation would be costly.\363\
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\359\ See Note 2 to paragraph (b)(9)(ii) of proposed Rule 14a-
2(b)(9); Proposing Release at 66532.
\360\ See, e.g., letter from SES (asserting that needing to sign
individual confidentiality agreements between every issuer and proxy
voting advice business would be cumbersome ``without any tangible
benefit'').
\361\ See, e.g., letter from Glass Lewis II (recommending that
the Commission remove the statement in the proposal that any
confidentiality agreement ``shall cease to apply once the proxy
voting advice business provides its advice to one or more
recipients'').
\362\ See, e.g., letter from Olshan LLP (stating that the
proposal significantly underestimates the time and expense of
negotiating confidentiality agreements and providing detailed
reasons as to why the proposal would be so time consuming and
costly).
\363\ See infra note 613.
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We believe that shifting to a principles-based requirement, which
allows the report to be provided to registrants at the same time it is
provided to clients, should eliminate or mitigate many of the concerns
expressed. In light of these changes, we believe that negotiating a
formal confidentiality agreement may not be necessary in all
circumstances. We therefore believe it is appropriate to make clear
that a proxy voting advice business may receive assurances from a
registrant regarding the use of the proxy voting advice through less
prescriptive means. Accordingly, paragraph (B) of the safe harbor in
Rule 14a-2(b)(9)(iii) permits proxy voting advice businesses to include
in their policies and procedures conditions requiring registrants to
limit their use of the advice in order to receive a copy of the proxy
voting advice. Such written policies and procedures may, but are not
required to, specify that registrants must first acknowledge that their
use of the proxy voting advice is restricted to the registrant's own
internal purposes and/or in connection with the solicitation and will
not be published or otherwise shared except with the registrants'
employees or advisers.\364\ Such acknowledgement could take a variety
of forms at the discretion of the proxy voting advice business,
including with respect to the duration of the acknowledgment. For
example, a policy under the safe harbor could specify that the
acknowledgement can or must be in the form of a written representation
or an oral acknowledgement, or the policy could prescribe that a
registrant must check a box or provide another electronic means of
confirming that the registrant agrees to standardized terms of service
before the materials could be accessed. To qualify for the safe harbor,
the terms of the acknowledgement could not be more restrictive than
those set forth in paragraph (B); however, if a proxy voting advice
business wishes to impose more tailored or restrictive conditions, it
could do so outside of the safe harbor, provided the policies and
procedures do not unreasonably inhibit timely notice to the registrant
consistent with the principles-based requirements of 14a-
2(b)(9)(ii)(A).
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\364\ A registrant's advisers would include, for example, its
attorneys and proxy solicitors.
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We also note that, unlike the proposal, the safe harbor does not
mandate the provision of draft proxy voting advice to registrants
before dissemination to clients of the proxy voting advice business,
which, as commenters noted, poses a higher risk of unintentional or
unauthorized release of the information and its potential misuse.\365\
Instead, compliance with the safe harbor requires only that the proxy
voting advice business provide its voting advice to registrants no
later than the time it is released to the business's clients.
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\365\ See, e.g., letters from Clem Geraghty, Ardevora Asset
Management LLP (Nov. 27, 2020) (``Ardevora''); CII IV; Elliott I;
ISS (expressing concern that the proposal would require a proxy
voting advice business to disclose material non-public information
to any registrant or eligible soliciting person who signs a
confidentiality agreement, even if that party is a known insider
trader, and stating that such an outcome would interfere with the
proxy voting advice business's obligations under the Investment
Advisers Act to establish, maintain, and enforce policies and
procedures reasonably designed to ensure compliance with insider
trading laws); SES (noting that the proposal could result in certain
company statements and information being made available to proxy
voting advice businesses and their clients, but not to other
shareholders).
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A proxy voting advice business that has a policy in place that
satisfies the principles-based requirements of Rule 14a-2(b)(9)(ii)(A),
such as a policy elucidated in, or that is consistent with, the safe-
harbor in Rule 14a-2(b)(9)(iii), will be under no obligation to provide
its proxy voting advice to registrants that fail to file a definitive
proxy statement early enough to meet the 40-day stipulation, or fail to
acknowledge the limitations on its use of the voting advice. Moreover,
in order to qualify for
[[Page 55112]]
the safe harbor, the proxy voting advice business's policy is not
required to contemplate that the business repeat the process of
providing a copy of its proxy voting advice to registrants if its
advice is later revised or updated in light of subsequent events. The
safe harbor does not impose any obligation on the proxy voting advice
business to provide registrants with additional opportunities to review
its proxy voting advice with respect to the same shareholder meeting.
In response to concerns raised by commenters, in order to limit the
logistical and other burdens imposed on proxy voting advice businesses,
as well as to lessen potential uncertainty over questions of
compliance,\366\ proxy voting advice businesses may, but will not be
required to, provide the registrant with additional materials that
update or supplement proxy voting advice previously provided.
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\366\ For example, if proxy voting advice businesses were
required under the safe harbor to redistribute proxy voting advice
to registrants as a result of any updates or addenda to the advice,
in many cases it might pose a difficult logistical challenge for the
businesses to meet their production deadlines, satisfy rapid turn-
around times and fulfill their delivery obligations to clients,
thereby exacerbating the businesses' difficulty in meeting an
already aggressive timeline so close to the date of the shareholder
meeting. In addition, the determination of which kinds of materials
would be covered by such a rule could lead to confusion and make
administration of the rule unnecessarily complex and time-consuming.
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So long as the proxy voting advice business meets the conditions of
the safe harbor in Rule 14a-2(b)(9)(iii), it will be deemed to satisfy
Rule 14a-2(b)(9)(ii)(A). Assuming it also satisfies the principles-
based requirement in new 17 CFR 240.14a-2(b)(9)(ii)(B) (``Rule 14a-
2(b)(9)(ii)(B)''); discussed below and otherwise meets the requirements
of Rule 14a-2(b)(9), the proxy voting advice business would be eligible
to rely on the exemptions in Rules 14a-2(b)(1) or (3) (subject to the
satisfaction of the other conditions of those exemptions).
By adopting this approach, as discussed above, we believe we have
addressed the concerns raised by commenters regarding the potential
unintended consequences of requiring a proxy voting advice business to
engage with a registrant in connection with its proxy voting advice,
including those related to timing \367\ and the risk of affecting the
independence of the advice \368\ or diminishing competition in the
proxy voting advice business industry.\369\ Specifically, because Rule
14a-2(b)(9)(ii) does not require proxy voting advice businesses to
adopt policies that would provide registrants with the opportunity to
review and provide feedback on their proxy voting advice before such
advice is disseminated to clients, the rule does not create the risk
that such advice would be delayed or that the independence thereof
would be tainted as a result of a registrant's pre-dissemination
involvement.\370\ Similarly, because proxy voting advice businesses are
not required to adopt policies that would provide notice to, or
otherwise require interaction with, registrants until they disseminate
advice to their clients, any concerns that commenters had regarding
increased marginal costs--and, correspondingly, diminished
competition--associated with preparing proxy voting advice as a result
of the proposed advance review and feedback process should be
alleviated. Commenters also identified potential unintended
consequences that could result from a heightened litigation risk that
proxy voting advice businesses could face as a result of the proposed
rules,\371\ which may have been viewed as more significant in
circumstances where differing views persisted following engagement with
the registrant. As with the other unintended consequences discussed
above, this concern is mitigated by the fact that under the principles-
based approach we are adopting, proxy voting advice businesses will not
be required to give registrants the opportunity to provide feedback on
their proxy voting advice before it is disseminated to clients.
---------------------------------------------------------------------------
\367\ See supra notes 276-279 and accompanying text.
\368\ See supra note 287 and accompanying text. A number of
commenters expressed concerns that the proposed advance review and
feedback process would conflict with FINRA Rule 2241, which
prohibits review of an analyst's research report by a subject
company for purposes other than factual verification. See letters
from AFL-CIO II; As You Sow II; BMO; Boston Trust; CII IV; NYC
Comptroller; New York Comptroller II; PIAC II; TRP. The final rules
address these concerns, as neither Rule 14a-2(b)(9)(ii)(A) nor Rule
14a-2(b)(9)(iii) requires that registrants be given the opportunity
to review or provide feedback on proxy voting advice before proxy
voting advice businesses provide such advice to their clients.
\369\ The competition-based unintended consequences that
commenters identified included diminished competition among proxy
voting advice businesses, a limitation in the market choice for
consumers of proxy voting advice, and a decline in the utility of
proxy voting advice. See supra notes 282, 283, 285 and accompanying
text.
\370\ Some commenters challenged the proposition that proxy
voting advice businesses currently provide disinterested,
independent advice. See, e.g., letters from BIO; BRT; CEC; CCMC; J.
Ward; NAM; Nareit; Nasdaq; SCG. As to commenters' concerns that the
proposed advance review mechanism could compromise the ability of
proxy voting advice businesses to provide disinterested, independent
advice, we note that according to its current procedures governing
registrants' advance review of its draft proxy analysis, rating, or
other research report, ISS states that it retains sole discretion
whether to accept any change recommended by the registrant. See
infra note 530 and accompanying text.
\371\ See supra notes 284, 286 and accompanying text.
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It is not a condition of this safe harbor, nor the principles-based
requirement, that the proxy voting advice business negotiate or
otherwise engage in a dialogue with the registrant, or revise its
voting advice in response to any feedback. The proxy voting advice
business is free to interact with the registrant to whatever extent and
in whatever manner it deems appropriate, provided it has a written
policy that satisfies its obligations. Although the Commission
encourages cooperation and an open dialogue between the parties to the
extent that it facilitates productive efforts to improve the quality of
proxy voting advice for the benefit of shareholders, the rule that we
are adopting does not prescribe the manner in which the parties conduct
themselves in this regard, and leaves the content of proxy voting
advice, as well as the specific methods and processes used to produce
it, within the proxy voting advice business's discretion.
As noted above, the safe harbor is intended to provide a proxy
voting advice business with a non-exclusive means to meet the
requirements of Rule 14a-2(b)(9)(ii)(A). Proxy voting advice businesses
may nonetheless choose to structure a policy that, though not within
the parameters of the safe harbor, is reasonably designed to ensure
that proxy voting advice is made available to registrants at or prior
to the time when the advice is disseminated to clients. We acknowledge
that there are different ways that a proxy voting advice business could
structure such a policy consistent with the rule, and the safe harbor
is not intended to become the de facto means by which the requirement
of Rule 14a-2(b)(9)(ii)(A) may be met.
ii. Mechanism To Become Aware of Registrant's Response and Safe Harbor
The Commission's proposal to require that proxy voting advice
businesses, at the request of a registrant, include in their voting
advice a hyperlink (or other analogous electronic medium) to the
registrant's statement about the voting advice was intended as an
efficient and timely means of providing the businesses' clients with
additional information that would assist them in assessing and
contextualizing the voting advice.\372\ In particular, the inclusion of
the hyperlink with the proxy voting advice would have permitted
clients, including investment advisers voting shares on behalf of other
shareholders, to consider the registrants' views at the same time as
the proxy voting advice
[[Page 55113]]
and before making their voting determinations. As the Commission has
noted, although registrants are able under the existing proxy rules to
file supplemental proxy materials to respond to proxy voting
recommendations that they may know about and to alert investors to any
disagreements with such proxy 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.\373\
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\372\ Proposing Release at 66533.
\373\ Id. at n.136. As we noted in the Proposing Release,
although shareholders have the ability to change their vote at any
time prior to a meeting--including as a result of supplemental proxy
materials filed by registrants in response to proxy voting advice--
to our knowledge, this seldom occurs. Id. at 66530 n.107. It is
possible, however, that under the final amendments, as a result of
proxy voting advice businesses' compliance with Rule 14a-
2(b)(9)(ii)(B), clients of proxy voting advice businesses will be
made aware of a registrant's response to proxy voting advice and,
therefore, more likely to change votes that were cast after
receiving such advice.
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As with the Commission's proposed review and response mechanism,
however, commenters have raised practical challenges and limitations
that the parties would face in implementing processes and systems
necessary to comply with the proposed rule's prescriptive
requirements.\374\ Accordingly, we believe that our objectives are
better addressed by a principles-based requirement, particularly in
light of the complexities and time pressures inherent in the proxy
system. By broadly outlining the overarching principles and allowing
the proxy voting advice businesses themselves to design a system of
compliance best suited to their operations, our aim is to promote
adherence to these principles in a flexible and minimally intrusive
manner.
---------------------------------------------------------------------------
\374\ See, e.g., letters from CII IV; Glass Lewis II.
---------------------------------------------------------------------------
Consequently, paragraph (B) of Rule 14a-2(b)(9)(ii) sets forth an
additional principle that a proxy voting advice business must observe
in order to avail itself of the exemptions found in Rules 14a-2(b)(1)
and (3). Specifically, a proxy voting advice business must adopt and
publicly \375\ disclose written policies and procedures reasonably
designed to ensure that it provides clients with a mechanism by which
they can reasonably be expected to become aware of a registrant's
written statements about the proxy voting advice in a timely manner
\376\ before the shareholder meeting (or, if no meeting, before the
vote, consent, or authorization may be used to effect the proposed
action).
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\375\ See supra note 340 for an example of how proxy voting
advice businesses may satisfy the requirement that such policies and
procedures be ``publicly'' disclosed and a discussion of the reasons
why we believe such requirement is important in the context of
paragraph (A) of Rule 14a-2(b)(9)(ii). With respect to paragraph
(B), it is likely that the clients of proxy voting advice businesses
would be provided with such policies and procedures even absent a
requirement that they be publicly disclosed. That said, in addition
to the ancillary transparency-based benefits discussed supra note
340, we believe that the public disclosure of such policies and
procedures will assist potential clients of proxy voting advice
businesses in evaluating the service offerings that the various
providers make available. Similarly, such public disclosure may
assist the investors on whose behalf such clients act in evaluating
whether any proxy voting decisions made on their behalf are informed
by both the relevant proxy voting advice and any registrant response
thereto.
\376\ In this context, a proxy voting advice business will have
become aware of a registrant's response to the proxy voting advice
in a ``timely manner'' if such client has sufficient time to
consider such response in connection with a vote.
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By shifting to a principles-based requirement, the rule allows the
proxy voting advice business to determine its specific manner of
compliance, while preserving the Commission's objective to facilitate
the ability of the business's clients to benefit from more complete
information when considering how to vote their proxies. As such, it
reflects the Commission's view that shareholders should have ready
access to a more complete mix of information to make informed voting
decisions. Rule 14a-2(b)(9)(ii)(B) is thus intended to help ensure that
proxy voting advice businesses provide clients with a mechanism by
which they can reasonably be expected to become aware of and access
more complete information, including the input and views of registrants
on proxy voting advice, in the compressed time period between when they
receive the advice and vote their proxies.
We believe access to the registrant's views on proxy advice may
benefit a proxy voting advice business's clients regardless of whether
the voting recommendation is adverse to the registrant's
recommendation. The registrant may have disagreements that extend
beyond the voting recommendation itself, such as noting factual errors
in the advice, differing views about the proxy voting advice business's
methodological approach or other perspectives that it believes are
relevant to the voting advice.\377\ Or the registrant may wish to
emphasize a particular point that the proxy voting advice business may
have noted or may not have noted in its advice. In circumstances where
the registrant largely or entirely agrees with the proxy voting advice
business's methodology or conclusions, that fact would likely be
relevant to and enhance a client's decision-making.
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\377\ See, e.g., IAC Recommendation (``The very differences in
such judgments [between corporate managers and proxy advisors] are
part of the value that independent advisors add to the proxy system
. . . . By advancing their views . . . proxy advisors create
meaningful public discussion of such topics. . . .'').
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A number of commenters argued that registrants' ability to file
supplemental proxy materials is sufficient to facilitate informed
shareholder voting decisions.\378\ Commenters have indicated, however,
that the clients of proxy voting advice businesses often cast their
votes before registrants can file such materials.\379\ Rule 14a-
2(b)(9)(ii)(B) requires that proxy voting advice businesses provide
clients with a mechanism by which they can reasonably be expected to
become aware that a registrant has filed such materials about the proxy
voting advice in time to consider the materials before they cast their
final vote. Due to the existing time constraints that proxy voting
advice business clients have identified in their comments to the
proposed rule,\380\ the rule will ensure that such clients have an
efficient means by which they can reasonably be expected to become
aware of additional information that may affect their analysis of the
proxy voting advice, and thereby their voting decisions, in the manner
that each proxy voting advice business determines is most cost-
efficient and best serves its clients.
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\378\ See, e.g., letters from Public Retirement System; AFL-CIO
2; CII IV; Glass Lewis II; ISS; New York Comptroller I. See also
note 373.
\379\ See, e.g., letters from NAREIT, NAM, Exxon Mobil. See also
Proposing Release at 53, n. 136.
\380\ See, e.g., letters from ACSI; BMO; CII VI; Florida Board;
Glass Lewis II; Hermes; ICI; New York Comptroller II; Ohio Public
Retirement; Olshan LLP; PRI II; Stewart; TIAA; TRP.
---------------------------------------------------------------------------
As with Rule 14a-2(b)(9)(ii)(A), we recognize that proxy voting
advice businesses may benefit from greater legal certainty about how to
satisfy this general principle. We are therefore providing a non-
exclusive safe harbor in new 17 CFR 240.14a-2(b)(9)(iv) (``Rule 14a-
2(b)(9)(iv)'') pursuant to which proxy voting advice businesses will be
deemed to satisfy the principle-based requirement of paragraph (ii)(B).
To satisfy this safe harbor, a proxy voting advice business must have
written policies and procedures reasonably designed to inform clients
who have received proxy voting advice about a particular registrant in
the event that such registrant notifies the proxy voting advice
business that the registrant either intends to file or has filed
additional soliciting materials with the Commission setting forth its
views
[[Page 55114]]
regarding such advice.\381\ The safe harbor sets forth two methods by
which the proxy voting advice business may provide such notice to its
clients. It may either:
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\381\ If a registrant notifies a proxy voting advice business
that the registrant intends to file additional soliciting materials
setting forth its views regarding the proxy voting advice business's
advice, then proxy voting advice business should consider whether,
for purposes of complying with this safe harbor requirement, it
needs to send two separate notices to the business's clients: (1)
One notice regarding the registrant's intent to file and (2) another
notice regarding the registrant's actual filing. Depending on the
particular facts and circumstances, the first notice may be needed
to inform clients of the fact that the registrant may be providing
views that could be material to their voting decisions and to allow
the clients to determine whether they wish to await these views
before submitting their votes, and with the second notice providing
the clients with the hyperlink to the registrant's soliciting
material once it is filed on EDGAR. We note that Rule 14a-
2(b)(9)(ii)(B), which is a principles-based requirement, gives proxy
voting advice businesses the option of formulating alternatives to
this approach as long as those alternatives achieve the principle
set forth in the rule.
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(A) Provide notice on its electronic client platform that the
registrant has filed, or has informed the proxy voting advice business
that it intends to file, additional soliciting materials (and include
an active hyperlink to those materials on EDGAR when available); \382\
or
---------------------------------------------------------------------------
\382\ Rule 14a-2(b)(9)(iv)(A).
---------------------------------------------------------------------------
(B) Provide notice through email or other electronic means that the
registrant has filed, or has informed the proxy voting advice business
that it intends to file, additional soliciting materials (and include
an active hyperlink to those materials on EDGAR when available).\383\
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\383\ Rule 14a-2(b)(9)(iv)(B).
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The safe harbor in Rule 14a-2(b)(9)(iv) establishes a convenient
mechanism by which the clients of a proxy voting advice business can
stay informed of, and timely consider, additional information with
respect to the proxy voting advice that the registrant believes is
material to the shareholders' voting determination. The safe harbor
provides a direct and simple means of alerting clients to the
availability of the views of the registrant as they consider the voting
advice.
The inclusion of the hyperlink required under Rule 14a-2(b)(9)(iv)
would not, by itself, make the proxy voting advice business liable for
the content of the hyperlinked registrant's statement. 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.\384\ As we explained in the Proposing
Release, we believe our view is consistent with this framework as a
proxy voting advice business likely would not be involved in the
preparation of the hyperlinked statement and likely would be including
the hyperlink to comply with the requirements of the Rule 14a-
2(b)(9)(iv) safe harbor, and not to endorse or approve the content of
the statement. Our view also extends to a proxy voting advice business
that chooses to satisfy the principle-based requirement of Rule 14a-
(b)(9)(ii)(B) outside of the Rule 14a-2(b)(9)(iv) safe harbor by
adopting written policies and procedures that contemplate the delivery
of a hyperlink to the registrant's statement to its clients.
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\384\ See Use of Electronic Media, Release No. 34-42728 (Apr.
28, 2000) [65 FR 25843 (May 4, 2000)].
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We note that proxy voting advice businesses will retain a
significant amount of discretion to formulate their own policies and
procedures and dictate the mechanics of notification in ways they
believe are most suitable to meet their clients' needs and compatible
with their operations, including specifying the preferred channel by
which registrants must notify the proxy voting advice business of
supplemental proxy filings, provided they comply with the broad
outlines of the safe harbor.
As discussed above, although proxy voting advice businesses may
prefer the legal certainty afforded by the safe harbor in Rule 14a-
2(b)(9)(iv), these provisions are not the exclusive means by which such
businesses may satisfy the principle-based requirement set forth in
Rule 14a-2(b)(9)(ii)(B). Proxy voting advice businesses may instead
develop their own policies and procedures outside of the safe harbor
that are reasonably designed to ensure that they provide clients with a
mechanism by which they can reasonably be expected to become aware of a
registrant's written response to the proxy voting advice in a timely
manner. We acknowledge that there are different ways that a proxy
voting advice business could structure such a policy consistent with
the rule, and the safe harbor is not intended to become the de facto
means by which the requirement of Rule 14a-2(b)(9)(ii)(B) may be met.
The proposed rules included a provision that would have excused
immaterial or unintentional failures to comply with the conditions of
Rule 14a-2(b)(9).\385\ This provision was motivated by our recognition
of a potentially significant adverse result for a proxy voting advice
business if it were to lose the ability to rely on the exemptions set
forth in Rules 14a-2(b)(1) or (b)(3) and be required to comply with the
federal proxy rules' information and filing requirements.\386\ Although
we recognize those potentially adverse results, we no longer view that
provision as necessary in light of the principles-based approach of the
final rules. Rule 14a-2(b)(9)(ii), as adopted, requires proxy voting
advice businesses to adopt written policies and procedures that are
reasonably designed to ensure satisfaction of paragraphs (A) and (B)
thereof. We believe the framework we are adopting is sufficiently
flexible to accomplish the Commission's objectives in ensuring
shareholders have available to them more transparent, accurate, and
complete information on which to base their voting determinations and
thereby promote informed decision-making, without unnecessarily
interfering with or burdening the complex infrastructure that is
important to the proper functioning of the proxy system. We also
believe that the principle of ensuring that proxy voting advice
businesses provide clients with a mechanism by which they can
reasonably be expected to become aware of registrants' written
statements regarding the proxy voting advice in a timely manner will
facilitate in particular the use and review of such advice by
investment advisers.\387\
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\385\ Proposing Release at 66535 (``[T]he 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
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.'').
\386\ Id. at n.146 (``[W]ithout 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.'').
\387\ The Commission previously issued guidance discussing how
the fiduciary duty and rule 206(4)-6 under the Advisers Act relate
to an investment adviser's exercise of voting authority on behalf of
clients and also provided examples to help facilitate investment
advisers' compliance with their proxy voting responsibilities. See
Commission Guidance on Proxy Voting Responsibilities. We expect that
Rule 14a-2(b)(9)(ii)(A) will result in registrants being made aware
of recommendations by proxy voting advice businesses in a timeframe
that will permit those registrants to make any views regarding those
recommendations available in a more timely manner than was
previously the case. We therefore are concurrently supplementing
that guidance to investment advisers in a separate Commission
release. See Supplemental Proxy Voting Guidance.
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[[Page 55115]]
We wish to emphasize that the principles-based approach we are
adopting in Rule 14a-2(b)(9)(ii) is intended to be adaptable to a
variety of circumstances and business models. Various policies and
procedures, beyond those in the safe harbors set forth in Rules 14a-
2(b)(9)(iii) and (iv), may be used to satisfy these principles. Whether
a proxy voting advice business has complied with the principles-based
requirements will be determined by the particular facts and
circumstances of the business's adopted written policies and procedures
and whether such facts and circumstances support the conclusion that
the particular policies and procedures are reasonably designed to
ensure that (1) registrants that are the subject of the proxy voting
advice have such advice made available to them at or prior to the time
when such advice is disseminated to the proxy voting advice business's
clients and (2) the proxy voting advice business provides its clients
with a mechanism by which they can reasonably be expected to become
aware that registrants have filed additional proxy materials that are
responsive to the proxy voting advice in a timely manner before the
shareholder meeting. Some relevant factors to be used in the analysis
include:
The degree to which a registrant has time to respond and
whether the policy ensures prompt conveyance of information to the
registrant.
The extent to which the mechanism provided to clients is
an efficient means by which they can reasonably be expected to become
aware of the registrant's written response, once it is filed, such that
the client has sufficient time to consider such response in connection
with a vote.
The reasonableness, based on facts and circumstances, of
any fees charged by a proxy voting advice business to a registrant as a
condition to receiving a copy of its proxy voting advice and the extent
to which such fees may dissuade a registrant from seeking to review and
provide a response to such proxy voting advice.
We reiterate that these factors are not exclusive and no single
factor or combination of factors will control the determination of
whether a proxy voting advice business has complied with the
principles-based requirements.
c. Exclusions From Rule 14a-2(b)(9)(ii) [Rules 14a-2(b)(9)(v) and (vi)]
Notwithstanding the benefits that we expect will accrue to clients
of proxy voting advice businesses, as well as the proxy voting system
as a whole, we recognize that the requirements of Rule 14a-2(b)(9)(ii)
may not be appropriate in all contexts. As such, pursuant to new Rules
14a-2(b)(9)(v) and (vi), respectively, proxy voting advice businesses
need not comply with Rule 14a-2(b)(9)(ii) in order to rely on either
the Rule 14a-2(b)(1) or (b)(3) exemption (1) to the extent that their
proxy voting advice is based on a custom policy \388\ or (2) if they
provide proxy voting advice as to non-exempt solicitations regarding
certain mergers and acquisitions or contested matters.\389\
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\388\ See Rule 14a-2(b)(9)(v).
\389\ See Rule 14a-2(b)(9)(vi).
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i. Custom Policies
As noted above,\390\ some commenters recommended--in the context of
our proposed amendments to Rule 14a-1(l)--that we amend the definitions
of ``solicit'' and ``solicitation'' to exclude proxy voting advice
based on custom policies.\391\ Specifically, one commenter that is a
proxy voting advice business noted that it ``does not own, and is
prohibited from disclosing, clients' custom policies and the
recommendations based thereon.'' \392\ That commenter also expressed
doubt as to the efficacy, from an investor protection standpoint, of
``allowing issuers to vet the methodologies and assumptions
institutional investors choose to implement for their own portfolios.''
\393\ Although we reaffirm our prior interpretation of the scope of the
terms ``solicit'' and ``solicitation'' and decline to amend their
definitions as those commenters suggested, we find these points to be
compelling with respect to the application of certain requirements of
Rule 14a-2(b)(9). We also understand these commenters' concerns
regarding the potential costs that would be imposed upon investors, as
well as their doubts regarding the corresponding investor protection-
based benefits, if the requirements of Rule 14a-2(b)(9)(ii) were to be
applied to proxy voting advice based on a custom policy.
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\390\ See supra note 112 and accompanying text.
\391\ See letters from ISS; New York Comptroller II; State
Street. See also supra note 165 for a link to a description of the
services that one major proxy voting advice business offers in
connection with its clients' custom policies.
\392\ Letter from ISS. See also letter from Glass Lewis II
(``Mandating that custom voting recommendations go through the
issuer review and feedback mechanisms would expose these investors'
confidential, proprietary information and force Glass Lewis to
breach its commitments to these clients.'').
\393\ Letter from ISS.
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In light of these concerns, we are adopting new Rule 14a-
2(b)(9)(v), which excludes from the scope of Rule 14a-2(b)(9)(ii) proxy
voting advice to the extent that such advice is based on custom
policies that are proprietary to a proxy voting advice business's
client.\394\
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\394\ Rule 14a-2(b)(9)(v). The term ``custom policies'' for
purposes of Rule 14a-2(b)(9)(v) would not include a proxy voting
advice business's benchmark or specialty policies, even if those
benchmark or specialty policies were to be adopted by a proxy voting
advice business's client as its own policy. See supra note 12. If,
however, a proxy voting advice business's client adopts a benchmark
or specialty policy as its own policy, then the proxy voting advice
business would have to satisfy the requirements of Rule 14a-
2(b)(9)(ii) only with respect to the proxy voting advice that is
based on the benchmark or specialty policy. For the avoidance of
doubt, Rule 14a-2(b)(9)(ii)(A) does not require that the proxy
voting advice business make available to the registrant multiple
copies of the same voting advice, and for purposes of Rule 14a-
2(b)(9)(ii)(B), the proxy voting advice business's policies and
procedures should be reasonably designed to provide such client with
a mechanism by which the client could reasonably be expected to
become aware of any written statement regarding the benchmark or
specialty policy.
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Our adoption of new Rule 14a-2(b)(9)(v) is not only motivated by
the potential costs that commenters identified, it also reflects our
belief that many of the goals of this rulemaking will still be achieved
with respect to proxy voting advice that is based on a custom policy,
notwithstanding the fact that such advice will not be subject to Rule
14a-2(b)(9)(ii). For example, as noted above and consistent with prior
Commission statements,\395\ such proxy voting advice will constitute a
``solicitation'' subject to Rule 14a-9, and persons who provide such
advice in reliance on the exemptions in either Rule 14a-2(b)(1) or
(b)(3) must comply with the conflicts of interest disclosure
requirements set forth in new Rule 14a-2(b)(9)(i). We further note that
proxy voting advice businesses generally use substantially the same
data to produce most of their voting advice (including reports
containing proxy voting advice based on benchmark, specialty, or custom
policies).\396\ In addition, it is our understanding of the proxy
voting advice market as it currently operates that proxy voting advice
businesses' clients that receive proxy voting advice pursuant to their
custom policies generally also receive the businesses' voting advice
based on the businesses' benchmark policies. Such benchmark policy
proxy voting advice contains the bulk of the data, research, and
analysis underlying custom policy proxy voting advice. Thus, because
the proxy voting advice based on the benchmark policies--including the
data, research, and analysis therein--would be subject to Rule 14a-
2(b)(9)(ii), clients that receive proxy voting advice pursuant to their
custom policies generally will
[[Page 55116]]
benefit from an awareness of any responses that the registrants may
file thereto.
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\395\ See supra text accompanying note 166.
\396\ See letter from ISS (``Because substantially the same data
are used to produce all ISS voting reports . . . .'').
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ii. Merger and Acquisition Transactions and Contested Solicitations
Solicitations involving merger and acquisition (``M&A'')
transactions or contested matters, such as contested director elections
where a dissident soliciting party proposes its own slate of director-
nominees, are generally fast-moving and can be subject to frequent
changes and short time windows.\397\ This often results in proxy voting
advice businesses having to deliver their advice to clients on a
tighter deadline, and with less lead time before the applicable
meeting, than they would under normal circumstances.\398\ As noted
above, some commenters expressed concerns regarding the practical
challenges and potential disruptions that the proposed review and
feedback mechanism, with its specified time frames for each step of the
process, would have caused in the context of M&A transactions or
contested solicitations.\399\ Commenters also expressed concerns about
the heightened risk that the proposed review and feedback mechanism,
which would involve reviews of proxy voting advice before it is
disseminated to clients, could pose regarding the disclosure of market-
moving or material, non-public information in the context of M&A
transactions or contested solicitations.\400\ We expect that these
concerns will be significantly alleviated, if not eliminated entirely,
by the fact that Rule 14a-2(b)(9)(ii), as adopted, does not include the
proposed advance review and feedback mechanism and, with its
principles-based requirements, provides proxy voting advice businesses
with added flexibility. For example, absent the proposed advanced
review and feedback mechanism, Rule 14a-2(b)(9)(ii)(A) does not
increase the risk that proxy voting advice businesses will disseminate
potentially market-moving or material, non-public information
selectively to registrants (or any other soliciting persons) before
they otherwise would disseminate such information to their clients.
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\397\ See, e.g., letter from Glass Lewis II (``[O]ur experience
is that contested situations are often much more fluid with both
sides making supplemental filings on a continuing basis as the
meeting date approaches.'').
\398\ See, e.g., id. (``Glass Lewis' data shows that report
preparation and delivery timing varies significantly for mergers and
acquisitions and other special situations. On average, proxy
research reports were delivered to clients 14 days before the
meeting date [in] M&A transactions and 13 days in contested
situations.'').
\399\ See supra note 279 and accompanying text. See also letters
from ISS (stating that the proposal would hinder ``the ability of
proxy advice to be appropriately responsive to important and often
fast-moving situations such as proxy fights and contested mergers
and acquisitions''); Glass Lewis II (``[I]t is important for a proxy
advisor, when appropriate to best meet its clients' needs, to be
able to defer providing its advice until near-final information is
available and to be able to quickly amend already-provided advice,
as needed.'').
\400\ See letters from CII I (``It is not clear whether the PA
Proposal creates the potential for insider trading on certain
market-moving recommendations and related analysis, particularly in
connection with mergers and acquisitions (M&A), and how the SEC
staff thought about such a risk in proposing the five-day review and
`final notice' periods.''); Elliott I (``The risks of insider
trading and leaks involving proxy voting advice are also higher when
a shareholder vote involves a material event. The Proposal would put
the draft proxy voting advice--potentially market-moving
information--in the hands of issuers before it is provided to the
investors who will act on it. This selective disclosure would
necessarily increase the risk that the information will be misused
or leaked, whether accidentally or deliberately.''); ISS (noting
that it currently ``safeguard[s] [material, non-public information]
by not pre-releasing potentially market-moving draft reports and
vote recommendations'' and allowing ``selected issuers a limited
review right of draft reports only for annual meetings, not special
meetings'' and asserting that the proposal ``rais[es] significant
concerns about confidentiality'' and ``selective disclosure of
material non-public information''); Glass Lewis II (``[W]e note that
commentators have raised significant questions about how the advance
knowledge gained in the review processes could be misused in
contested situations that should be addressed and resolved before
adopting any rule mandating review in this context.''). As they
likely are already aware (based on the concerns expressed in the
foregoing comment letters), we remind proxy voting advice businesses
that they have a responsibility to safeguard any material, non-
public information in their possession. Although that responsibility
is heightened in the context of shareholder meetings regarding M&A
transactions or contested matters, when such information is
particularly sensitive and potentially market-moving, we expect
proxy voting advice businesses to discharge that responsibility in
all situations.
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To further address concerns raised by commenters, we are also
adopting new 17 CFR 240.14a-2(b)(9)(vi) (``Rule 14a-2(b)(9)(vi)''),
which excludes from the requirements of Rule 14a-2(b)(9)(ii) any
portion of the proxy voting advice that makes a recommendation, as well
as any analysis and research underlying such recommendation that is
furnished along therewith, as to a solicitation subject to Rule 14a-
3(a) \401\:
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\401\ 17 CFR 240.14a-3(a).
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(A) To approve any transaction specified in Rule 145(a) of the
Securities Act; \402\ or
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\402\ Rule 14a-2(b)(9)(vi)(A). Rule 145(a) lists and describes
certain M&A transactions that are broadly categorized as
reclassifications, mergers of consolidation, and transfers of
assets. See 17 CFR 230.145(a).
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(B) By any person or group of persons for the purpose of opposing a
solicitation subject to Regulation 14A by any other person or group of
persons.\403\
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\403\ Rule 14a-2(b)(9)(vi)(B).
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As a result of new Rule 14a-2(b)(9)(vi), proxy voting advice
businesses would be permitted (but not required) to adopt written
policies and procedures pursuant to which the businesses would not make
available to registrants any portion of the proxy voting advice
relating to M&A transactions and contested matters at or prior to the
time such advice is disseminated to clients and to exclude the
registrant's response to such advice from the requirement of Rule 14a-
2(b)(9)(ii)(B). To be eligible to rely on Rule 14a-2(b)(9)(vi), a proxy
voting advice business must be providing advice with respect to a
solicitation subject to Rule 14a-3(a). This requirement is intended to
limit the scope of Rule 14a-2(b)(9)(vi) to proxy voting advice with
respect to solicitations that are subject to the Federal proxy rules'
information and filing requirements, including the requirement to file
and furnish a definitive proxy statement. By contrast, proxy voting
advice businesses providing advice with respect to any exempt
solicitations (including solicitations as to M&A transactions or
contested matters) would be ineligible to rely on the exception in Rule
14a-2(b)(9)(vi).
For the avoidance of doubt, this exception from the requirements of
Rule 14a-2(b)(9)(ii) applies only to the portions of the proxy voting
advice relating to the applicable M&A transaction \404\ or contested
matters and not to proxy voting advice regarding other matters
presented at the relevant meeting. If, therefore, there is a
shareholder meeting at which the only items presented for approval are
the applicable M&A transaction or contested matters, a proxy voting
advice business could have written policies and procedures that permit
the entirety of the proxy voting advice provided with respect to that
meeting to be
[[Page 55117]]
excluded from the requirements set forth in Rule 14a-2(b)(9)(ii). If,
however, additional matters are presented for shareholder approval at
such meeting, then only the portion of the proxy voting advice provided
with respect to the applicable M&A transaction or contested matters
could be excluded from the requirements set forth in Rule 14a-
2(b)(9)(ii).
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\404\ We recognize that a registrant or other soliciting person
may present at the shareholder meeting other matters that, while not
directly approving an M&A transaction or a contested matter, are
nevertheless closely related to such transaction or contested
matter. For example, a registrant's definitive proxy statement may
seek approval of a proposed M&A transaction, approval of the
issuance of the registrant's securities to finance the M&A
transaction, and an advisory vote on the ``golden parachute''
payments to be made in connection with the M&A transaction. In such
a situation, the latter two matters may be sufficiently integral to
the M&A transaction such that redaction of the proxy voting advice
on the M&A transaction alone would render the proxy voting advice on
the remaining matters to be confusing for a registrant reading such
advice. In such a case, the Rule 14a-2(b)(9)(vi) exception would be
available for all three matters. The determination of whether a
matter is sufficiently integral to an M&A transaction or contested
matter to fall within the Rule 14a-2(b)(9)(vi) exception will depend
on the particular facts and circumstances.
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We understand that proxy voting advice businesses often provide
their proxy voting advice on all matters for which security holders are
solicited at a particular meeting (e.g., contested and uncontested
matters, M&A- and non-M&A-related matters, etc.) together in a single
report.\405\ If a proxy voting advice business takes this approach but
wishes to avail itself of the exception set forth in Rule 14a-
2(b)(9)(vi), it can do so, for example, by redacting the portion of the
report that contains proxy voting advice as to the applicable M&A
transaction or contested matters in the version of such report that is
provided to a registrant pursuant to Rule 14a-2(b)(9)(ii)(A). We
further understand that at least one proxy voting advice business
currently provides its clients with a separate, standalone report that
provides recommendations only with respect to the M&A transactions or
contested matters presented at the meeting.\406\ If a proxy voting
advice business adopts this approach with respect to M&A transactions
and contested matters, then, under Rule 14a-2(b)(9)(vi), the
requirements of Rule 14a-2(b)(9)(ii) would not be applicable to such
standalone report. Finally, to the extent that a proxy voting advice
business finds it too burdensome to either redact or bifurcate its
reports, it is not required to avail itself of the exception set forth
in Rule 14a-2(b)(9)(vi). Instead, the proxy voting advice business can
choose to subject all of its proxy voting advice--including its advice
as to the applicable M&A transaction and contested matters--to the
requirements of Rule 14a-2(b)(9)(ii), subject to the proxy voting
advice business's obligation to safeguard material, non-public
information in its possession.\407\
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\405\ Proposing Release at n.112 (``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 . . . .'').
\406\ See ISS, Special Situations Research, available at https://www.issgovernance.com/solutions/governance-advisory-services/special-situations-research/ (last visited on May 28, 2020).
\407\ If a proxy voting advice business decides not to avail
itself of the exception set forth in Rule 14a-2(b)(9)(vi) and
subjects its advice as to the applicable M&A transaction or
contested matter to Rule 14a-2(b)(9)(ii), we believe that many of
the concerns commenters expressed will be mitigated by the changes
we made from the proposal. For example, to the extent that proxy
voting advice businesses generally deliver their advice with respect
to M&A transactions or contested matters to clients with less lead
time before the applicable meeting, the principles-based
requirements of Rule 14a-2(b)(9)(ii)(A) allows proxy voting advice
businesses to design and implement policies and procedures that work
best for their clients' needs and timing concerns. In addition, to
the extent that proxy voting advice businesses amend their advice
with respect to M&A transactions or contested matters in light of
subsequent events, Rule 14a-2(b)(9)(ii)(A) does not require that
proxy voting advice businesses make available to registrants such
amended advice.
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As with proxy voting advice that is based on a custom policy, proxy
voting advice that is excluded from the scope of Rule 14a-2(b)(9)(ii)
pursuant to new paragraph (vi) will constitute a ``solicitation''
subject to Rule 14a-9. Similarly, persons who provide such advice in
reliance on the exemptions in either Rule 14a-2(b)(1) or (b)(3) must
comply with the conflicts of interest disclosure requirements set forth
in new Rule 14a-2(b)(9)(i).
d. Response to Constitutional Objections
Some commenters raised First Amendment objections to the proposed
amendments.\408\ Their concerns focused primarily on the proposed
registrant review and feedback provisions and the requirement that
proxy voting advice businesses include in their advice a hyperlink to
the registrant's response. The final amendments incorporate substantial
modifications that address these concerns.
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\408\ See, e.g., letters from CFA Institute I; CII IV; CIRCA;
Elliott I; Glass Lewis II; ISS; Interfaith Center II; New York
Comptroller II; NorthStar; Shareholder Rights II; Washington State
Investment; ValueEdge III (stating that it has contacted the
Department of Justice to review this proposal and recommends the
Commission do the same). Most of these commenters generally opposed
the proposed amendments on Constitutional grounds. Further, to the
extent such commenters suggested potential alternative regulatory
solutions, no commenters offered a more tailored solution that we
believe would still achieve the objectives of this rulemaking.
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As discussed above, the proposed amendments requiring that proxy
voting advice businesses give registrants an opportunity to review and
provide feedback on their advice before the advice is disseminated to
clients have not been included in the final amendments. Under the final
amendments, proxy voting advice businesses can satisfy Rule 14a-
2(b)(9)(ii)(A) by ensuring that their advice is made available to
registrants at or prior to the time when such advice is disseminated to
the proxy voting advice business's clients.\409\ Commenters also argued
that requiring proxy voting advice businesses to share with registrants
proxy voting advice that is based on custom policies would
unconstitutionally compel them to disclose confidential client
information.\410\ Our decision to exclude such advice from Rule 14a-
2(b)(9)(ii) should eliminate that concern.\411\ Moreover, under the
safe harbor in Rule 14a-2(b)(9)(iii), a proxy voting advice business
has no obligation to provide a copy of its advice to a registrant
unless such registrant acknowledges certain limits on its use of the
advice.\412\ Nor must a proxy voting advice business that avails itself
of such safe harbor share its proxy voting advice if the registrant
files its definitive proxy statement less than 40 calendar days before
the shareholder meeting.
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\409\ Rule 14a-2(b)(ii)(A). See also supra note 342 and
accompanying text. We note that at least one proxy voting advice
business already makes its proxy reports available for purchase by
registrants upon their release to client. See Glass Lewis: Purchase
a Proxy Paper, available at https://www.glasslewis.com/request-a-proxy-paper-or-alert/ (last visited on May 26, 2020).
\410\ See supra note 408.
\411\ See Rule 14a-2(b)(9)(v).
\412\ We also believe that these modifications from the
proposal--among others, the fact that proxy voting advice businesses
are not required to give registrants an opportunity to review proxy
advice before its dissemination to clients and need not share the
advice at all unless registrants acknowledge restrictions on its
use--address the concerns raised by some commenters under the
takings clause of the Fifth Amendment. See letters from CalPERS;
ISS.
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In addition, we have replaced the proposed requirement that proxy
voting advice businesses include in their proxy voting advice a
hyperlink to the registrant's response with a principles-based
obligation to adopt policies and procedures reasonably designed to
ensure that proxy voting advice businesses provide clients with a
mechanism by which they can reasonably be expected to become aware of
the registrant's written response in a timely manner. Rule 14a-
2(b)(9)(ii)(B) gives proxy voting advice businesses flexibility in
determining how to achieve compliance with this requirement in the
manner best suited to their business. They also have the option of
relying on the safe harbor set forth in Rule 14a-2(b)(9)(iv), which
involves adopting policies and procedures to provide clients a
hyperlink to the registrant's written response once the registrant
gives notice that a response has been filed. However, Rule 14a-
2(b)(9)(ii)(B) does not mandate that specific approach as a condition
of the exemption.\413\
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\413\ For example, we understand that some proxy voting advice
businesses already provide access to the registrant's proxy filings,
including any supplemental proxy materials, automatically through
their electronic platform. This kind of approach would generally be
consistent with the principle.
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[[Page 55118]]
We believe that the amendments, as modified from the proposal, are
consistent with the First Amendment. In today's market, the proxy
process represents the primary means by which registrants and their
shareholders communicate to determine how the registrant governs
itself. They exchange their respective views about the registrants'
business operations and other registrant matters, and generally engage
in discussions integral to the exercise of the shareholder
franchise.\414\ The Commission has a strong interest in ensuring that
investors are able to obtain and evaluate information pertinent to
proxy voting decisions before the vote is held.\415\ The amendments are
intended to facilitate the kind of robust discussion on which informed
shareholder voting decisions depend in light of changing market
conditions. Specifically, as discussed above, proxy voting advice
businesses today are uniquely situated to influence the voting
decisions of institutional investors, which hold an increasingly
significant portion of shares in U.S. public companies.\416\ The
provision of proxy voting advice by these businesses therefore
implicates a fundamental concern of our proxy rules.\417\ Yet, because
a significant percentage of proxy votes are typically cast shortly
after a proxy voting advice business delivers its advice, and because
currently proxy voting advice is not required to be publicly filed,
many voting decisions are made before registrants have a meaningful
opportunity to engage with that advice--for example, to address any
material factual errors or omissions, or to offer views with respect to
the proxy voting advice business's methodologies or conclusions--and to
make investors aware of their views in time for investors to benefit
from such an exchange.\418\
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\414\ Pac. Gas & Elec. Co. v. Pub. Utils. Comm'n of Ca., 475
U.S. 1, 14 n.10 (1986).
\415\ Communications Among Shareholders Adopting Release at
48277; Concept Release at 42983; see also Business Roundtable, 905
F.2d at 410 (``The goal of federal proxy regulation was to improve
[communications with potential absentee voters] and thereby to
enable proxy voters to control the corporation as effectively as
they might have by attending a shareholder meeting.'').
\416\ See supra note 18.
\417\ See supra notes 6 through 17 and accompanying text.
\418\ See supra note 373 and accompanying text.
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As previously discussed, the Commission has occasionally adjusted
the proxy rules based on market developments to promote informed proxy
voting decision-making.\419\ The developments described above have
convinced us of the need to update the application of the proxy rules
to proxy voting advice businesses to facilitate the kind of robust
discussion that would be possible at a meeting before a vote occurs.
But at this time we do not believe it is necessary to subject proxy
voting advice businesses to the full panoply of information and filing
requirements that apply to registrants when seeking proxy authority.
While registrants must publicly file soliciting materials and
disseminate them to all shareholders, the Commission believes its
objectives with respect to proxy voting advice businesses can be
achieved by more tailored and far less burdensome and intrusive means.
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\419\ See supra notes 33-35 and accompanying text. Contrary to
the suggestion of some commenters, the Commission's measured pursuit
of a similar objective in the amendments adopted in this document
does not contradict our past recognition that applying governmental
filing requirements to every communication among shareholders and
other parties on matters subject to a proxy vote would raise First
Amendment concerns. See supra note 270 and accompanying text.
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We are therefore adopting amendments that allow proxy voting advice
businesses to continue to be exempt from the filing and information
requirements of the proxy rules, conditioned on their inclusion in the
proxy voting advice of the conflicts of interest disclosure specified
in Rule 14a-2(b)(9)(i) and their adoption and public disclosure of
policies and procedures specified in Rule 14a-2(b)(9)(ii).\420\ These
principles-based requirements are tailored to minimize the burden on
proxy voting advice businesses, while still directly advancing the
Commission's regulatory objectives.
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\420\ See supra Sections II.B.3; II.C.3.
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Although some commenters argued that the proposed amendments
discriminated based on viewpoint,\421\ our decision to impose exemption
conditions on proxy voting advice businesses is unrelated to their
viewpoint or message. The conditions apply regardless of the position a
proxy voting advice business takes on any particular matter, and
regardless of whether voting advice is supportive or adverse to
registrants or to others. Proxy voting advice is subject to our proxy
rules because it constitutes a ``solicitation'' under the Exchange Act.
We have tailored the application of those rules to accommodate the
unique business model of proxy voting advice businesses while also
accounting for the consequential role those businesses have come to
play in the proxy process.\422\ The amendments to the proxy rules that
we adopt in this document--like the rules that apply to registrants and
other interested parties under the comprehensive regulatory scheme
governing the proxy solicitation process--are intended to facilitate
investor access, in a timely manner, to more accurate, complete, and
transparent information and robust debate, as would occur at a meeting
where shareholders are physically attending and participating. Indeed,
the exemption conditions for proxy voting advice apply regardless of
the content of the advice on any matter, and far from disapproving of
the speech of proxy voting advice businesses, the Commission has
recognized the important function proxy voting advice businesses serve
in today's markets to some investors.\423\
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\421\ See, e.g., letters from Better Markets (expressing concern
that apprehensions regarding the accuracy of proxy voting advice
businesses' advice have been driven by potentially self-interested
corporate management that view proxy voting advice businesses as
adversarial); CalPERS; Florida Board; Glass Lewis II; ISS; NYC
Comptroller; New York Comptroller II; Public Citizen; Segal Marco
II; TRP.
\422\ See SEC v. Wall Street Publishing Inst., Inc., 851 F.2d
365, 372 (D.C. Cir. 1988) (``Where the federal government
extensively regulates a field of economic activity, communication of
the regulated parties often bears directly on the particular
economic objectives sought by the government, . . . and regulation
of such communications has been upheld [as consistent with the First
Amendment].''); cf. Full Value Advisors, LLC v. SEC, 633 F.3d 1101,
1109 (D.C. Cir. 2011) (``Securities regulation involves a different
balance of concerns and calls for different applications of First
Amendment principles.'') (internal quotation marks omitted).
\423\ See supra Section II.A.3.
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D. Amendments to Rule 14a-9
1. Proposed Amendments
Rule 14a-9 prohibits any proxy solicitation from containing false
or misleading statements with respect to any material fact at the time
and in light of the circumstances under which the statements are
made.\424\ In addition, such solicitation must not omit to state any
material fact necessary in order to make the statements therein not
false or misleading.\425\ 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
[[Page 55119]]
materially false or misleading.'' \426\ 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.\427\ We continue to believe that subjecting proxy voting
advice businesses to the same antifraud standard as registrants and
other persons engaged in soliciting activities, including those engaged
in exempt solicitations, is appropriate in the public interest and for
the protection of investors. Indeed, the Commission recently issued
guidance specifically addressing the application of Rule 14a-9 to proxy
voting advice,\428\ stating that ``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 advice or which would affect its analysis and
judgments, that would be required to make the advice not misleading.''
\429\ To illustrate this point, the Commission gave a list of examples
of types of information that a provider of proxy voting advice should
consider disclosing in order to avoid a potential violation of Rule
14a-9.\430\ This included the methodology used to formulate proxy
voting advice, sources of information on which the advice is based, and
material conflicts of interest that arise in connection with providing
proxy voting advice, without which the advice could be misleading,
depending on the specific statements at issue.\431\
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\424\ 17 CFR 240.14a-9. See also Exchange Act Release No. 34-
1350, 1937 WL 29099 (Aug. 13. 1937) (``The purpose of [the
Commission's proxy] rules is to prevent the dissemination to the
security holders and to the general public of untruths, half-truths,
and otherwise misleading information which would stand in the way of
a fair appraisal of a plan upon its merits by the security
holders.'').
\425\ 17 CFR 240.14a-9.
\426\ See 1979 Adopting Release at 48942.
\427\ See Concept Release at 43010.
\428\ See Question and Response 2 of 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 and Guidance'').
\429\ Id. at 12.
\430\ Id. The Commission also noted that some proxy voting
advice businesses currently may be providing some of the disclosures
described in the list of examples. Id. at n. 33.
\431\ Id.
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Currently, the text of Rule 14a-9 provides four examples of things
that may be misleading within the meaning of the rule, depending upon
particular facts and circumstances.\432\ These are:
---------------------------------------------------------------------------
\432\ Rule 14a-9 provides a note preceding the list of examples
that reads: ``The following are some examples of what, depending
upon particular facts and circumstances, may be misleading within
the meaning of this section.'' This note and the examples provided
were adopted in their current form by the Commission in 1956. See
Release No. 34-5276 (Jan. 17, 1956) [21 FR 577 (Jan. 26, 1956)],
1956 WL 7757.
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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.
The Commission proposed to amend this list of examples in Rule 14a-
9 to include certain additional types of information that a proxy
voting advice business may, depending on the particular facts and
circumstances, need to disclose to avoid potentially violating the
rule. As proposed, and consistent with the Commission's recent
guidance, this included the proxy advice business's methodology,
sources of information and/or conflicts of interest to the extent that,
under the particular facts and circumstances, the omission of such
information would be materially misleading.
In addition, the Commission proposed to amend Rule 14a-9 to address
concerns that have arisen 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.\433\ The Commission explained that, without additional
context or clarification, some 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 proxy voting advice business's
determination that the registrant did not satisfy the specific 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 some 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 disclosure, clients are led
to mistakenly believe that the unique criteria used by the proxy voting
advice businesses were approved or set by the Commission.
---------------------------------------------------------------------------
\433\ See Proposing Release at 66538 n.160.
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Accordingly, the Commission proposed to add as an example in Rule
14a-9 of what may be misleading within the meaning of the rule,
depending upon the particular facts and circumstances, the failure to
disclose the use of standards or requirements in proxy voting advice
that materially differ from relevant standards or requirements that the
Commission sets or approves.\434\
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\434\ See note (e) to proposed Rule 14a-9. Examples of standards
or requirements that the Commission approves are the listing
standards of the national securities exchanges, such as the New York
Stock Exchange (NYSE). The Commission 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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2. Comments Received
Commenters were divided in their views about the proposed
amendment.\435\ Those in favor of the proposal thought it would have a
beneficial impact, reasoning that it would tend to improve the quality
of voting advice by making proxy voting advice businesses more
accountable for any misleading statements in their advice \436\ and
incentivizing them to provide more robust information about their
methods and sources so that their clients would be in a better position
to assess the businesses' recommendations and make informed voting
decisions.\437\
[[Page 55120]]
Several such commenters voiced concerns that proxy voting advice
businesses were not sufficiently transparent about their methodologies,
models, and formulas used to generate their recommendations.\438\ Some
commenters also believed that proxy voting advice businesses do not
adequately adjust their methodologies to take into account the unique
circumstances of different companies and therefore more transparent
disclosure of methodologies would help investors discern the extent to
which voting advice may be based on a ``one-size-fits-all''
approach.\439\
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\435\ See letters from commenters supporting the proposal, e.g.,
ACCF (asserting that the proposals will increase accountability);
Axcelis; John D. Campbell, Vice President, Government Relations,
Ball Corporation (Jan. 31, 2020) (``Ball Corp.''); BIO; BRT; CCMC;
CGC; Charter; Ecolab; ExxonMobil; FedEx; GM; IBC; NAM; Nareit;
Nasdaq; SCG; James L. Setterlund, Executive Director, Shareholder
Advocacy Forum (Feb. 3, 2020) (``Shareholder Advocacy''); TechNet.
But see letters from commenters opposing the proposal, e.g., Baillie
Gifford; CalPERS; CII IV; CIRCA; Elliott I; Glass Lewis II; ISS; MFA
& AIMA; PIAC II (although it agreed that proxy voting advice
businesses should disclose material information relating to their
methodology, sources of information, and conflicts of interest, the
commenter indicated that it was satisfied with the disclosures
currently provided and did not believe specific regulation on this
point was necessary).
\436\ See, e.g., letters from ExxonMobil (supporting the
proposal's clarification that Rule 14a-9 applies to material
information concerning a proxy voting advice business's methodology,
sources of information, and conflicts of interest); GM.
\437\ See, e.g., letters from BRT (``[I]t is important that
proxy advisors not omit the disclosure of information underlying the
basis of their advice or which would affect its analysis and
judgment''); ExxonMobil; Nasdaq (``We agree with the Commission that
the amendments are in the public interest, promote investor
protection, and help ensure that investors are provided the
information they need to make fully informed voting decisions.'');
SCG.
\438\ See, e.g., letters from BRT (``Proxy advisors offer little
transparency into their internal standards, procedures, and
methodologies. Neither ISS nor Glass Lewis fully discloses the
methodologies used to develop their voting recommendations''); CEC;
FedEx; GM; NAM; Nasdaq; TechNet.
\439\ See, e.g., letters from CCMC (noting that proxy voting
advice businesses have been criticized for ``a one-size-fits-all
approach of voting recommendations that ignores the unique
characteristics and operations of individual companies and
industries''); FedEx; Nasdaq; NAM; Nareit; TechNet (further noting
that ``one-size-fits-all'' methodologies across different subject
areas often fail to account for unique differences between
companies).
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Other commenters specifically approved of the proposed amendment's
reference to a proxy voting advice business's use of standards that
materially differ from relevant Commission standards or
requirements.\440\ These commenters were concerned that not all
investors were fully aware when proxy voting advice businesses applied
their own analytical standards that differed from the Commission's or
other applicable regulatory standards.\441\
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\440\ See, e.g., letters from BRT; CCMC; GM (``[N]egative voting
recommendations from a proxy advisor may not align with the
Commission's requirements, which can mislead or cause confusion
among proxy voters. We therefore believe that proxy voters should
have the benefit of this additional context to ensure that they are
fully informed and understand the standards employed by a proxy
advisor when reviewing their voting recommendations.''); Nareit;
Nasdaq (``In Nasdaq's own experience, ISS has determined that a
director was not independent under its criteria even though the
director was independent under Nasdaq and SEC rules.''); SCG.
\441\ See, e.g., letters from BIO (stating ``that it is
important for proxy voting advice businesses to clarify when a
negative voting recommendation is based on the proxy voting advice
business's own determination that a registrant's conduct or
disclosure is inadequate, notwithstanding that the conduct or
disclosure meets applicable SEC requirements''); BRT (``Business
Roundtable member companies are concerned that, when making
recommendations, proxy advisors rely upon information not included
in the company's public SEC filings or on factors other than the
actual regulatory requirements to which companies are subject. For
instance, proxy advisors have their own guidelines for determining
the independence of directors. This has resulted in situations where
a proxy advisor recommends against a director's election because it
decided that the director is not independent under its standards,
despite the fact that the company's board of directors--carrying out
its fiduciary duties-- determined that the director in question was
independent under the Commission's requirements, the company's stock
exchange listing rules and its corporate governance guidelines.'');
Charter; SCG (asserting that proxy voting advice businesses ``apply
standards or policies that differ from SEC and/or stock exchange
listing requirements frequently enough that it strains credulity to
believe that the reasonable investor always understands whether a
voting recommendation reflects (non)compliance with existing rules/
regulations/standards or simply proxy advisor judgment'').
---------------------------------------------------------------------------
On the other hand, some commenters contended that, in general, the
proposed amendment to Rule 14a-9 would heighten legal uncertainty and
litigation risk for proxy voting advice businesses because it would
broaden the concept of materiality and create a new source of liability
for proxy voting advice businesses, the scope of which is not
sufficiently clear.\442\ Two commenters also suggested that the
proposed amendment may be prohibited by the First Amendment.\443\
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\442\ See, e.g., letters from Carl C. Icahn (Feb. 7, 2020) (``C.
Icahn''); CalPERS; CIRCA; Elliott I; Glass Lewis II (asserting that
the Commission does not adequately explain how, for example, a
failure to disclose information regarding ``use of standards that
materially differ from relevant standards or requirements that the
Commission sets or approves'' could mislead shareholders); MFA &
AIMA.
\443\ See letters from CII IV; ISS. Our clarification below that
differences of opinion are not actionable under the final amendment
to Rule 14a-9 resolves these constitutional concerns.
---------------------------------------------------------------------------
Commenters that opposed the proposed amendment's reference to a
proxy voting advice business's use of standards that materially differ
from relevant Commission standards or requirements argued that it was
unnecessary and based on the flawed premise that clients are either
unaware of, or lack the sophistication necessary to appreciate, the
distinction between a company's failure to satisfy the particular
analytical standards employed by a proxy voting advice business and a
company's failure to comply with relevant regulatory standards.\444\
Commenters made the point that most clients are well aware of such
differences and often maintain custom policies that are more rigorous
than relevant regulatory standards and require the proxy voting advice
business to apply such policies when preparing their proxy voting
advice.\445\ Moreover, commenters stated that in many cases clients
hire proxy voting advice businesses precisely because they are aware
and approve of these businesses using certain standards that exceed
applicable regulations.\446\ In addition, other commenters asserted
that the proxy voting advice businesses' disclosures about the use of
differing standards were already sufficiently clear.\447\
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\444\ See, e.g., letters from CalPERS (``We think it would be
rare for the professionals that actually use proxy voting advice to
make such a mistaken inference.''); CII IV; Glass Lewis II.
\445\ See, e.g., letters from CalPERS (``Existing clients . . .
already know when proxy voting advice businesses produce their own
guidance as opposed to report on the minimal requirements of the
SEC.''); CII IV; Glass Lewis II.
\446\ See, e.g., letter from PIAC II (``Proxy advisors are paid
to make recommendations based on governance best practices rather
than legal or regulatory minimums and PIAC members expect the
standards of proxy advisors to exceed those minimums.'').
\447\ See, e.g., letters from CalPERS (``[The Proposing Release]
provides examples highlighting a problem that does not exist in
reality because proxy voting advice businesses already distinguish
their advice from SEC guidance . . . Competent lay people doing a
minimal amount of research will find that proxy advisors routinely
inform clients about where the standards come from because clients
want to know.''); CII IV (noting that the Commission did not produce
examples of research reports to support its assertions in the
Proposing Release).
---------------------------------------------------------------------------
Finally, some commenters recommended modifications to the proposal
that would have added a number of specific examples to the list in Rule
14a-9 of information that may be material and needs to be disclosed in
certain circumstances.\448\ Others requested further clarification on
questions related to the scope and application of the proposed
amendment \449\ or suggested that Rule 14a-9 be modified to exclude the
content of recommendations or differences of opinion between management
and proxy voting advice businesses.\450\
---------------------------------------------------------------------------
\448\ See, e.g., letters from BRT; CCMC (``[W]e would expand the
`relevant standards or requirements' to also include those set by
any relevant stock exchange. As another example, we would also list
a proxy advisor's failure to disclose whether a registrant disputes
any findings in the proxy advisor's report or whether a proxy
advisor diverges from its own publicly disclosed guidelines.'');
Exxon Mobil (suggesting that the rules should also address proxy
voting advice that is ``not designed to maximize shareholder value,
like SRI specialty reports'' and require ``risk factor'' style
disclosures about the value of an investment when a proxy voting
advice businesses applies a standard other than shareholder value);
Nareit (requesting the Commission to expand the list to require
disclosure ``when voting is predicated on an advisory firm's
standard that materially differs from relevant statutory
requirements of the state in which the issuer is chartered'');
Nasdaq; TechNet.
\449\ See, e.g., letters from Baillie Gifford (inquiring, among
other things, whether failure to disclose conflicts of interest
would be a breach of Rule 14a-9); K. Beaugez; BRT (``Additionally,
the Commission should specifically make clear whether these anti-
fraud provisions [of Rule 14a-9] apply when proxy advisors' voting
reports include information, statements or opinions that have not
been included in material filed with the Commission''); Exxon Mobil;
CIRCA.
\450\ See letter from PRI II.
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[[Page 55121]]
3. Final Amendments
We are adopting amendments to Rule 14a-9 that will add to the
examples of what may be misleading within the meaning of the rule,
largely as proposed, but with one modification in response to comments
received. Consistent with the Commission's guidance on proxy voting
advice,\451\ the Note to Rule 14a-9 will include new paragraph (e) to
provide that the failure to disclose material information regarding
proxy voting advice, ``such as the proxy voting advice business's
methodology, sources of information, or conflicts of interest'' could,
depending upon particular facts and circumstances, be misleading within
the meaning of the rule. However, for the reasons given in the
discussion that follows, new paragraph (e) will not include the
proposed clause ``or use of standards that materially differ from
relevant standards or requirements that the Commission sets or
approves.''
---------------------------------------------------------------------------
\451\ See supra notes 428 through 431 and accompanying text.
---------------------------------------------------------------------------
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. Consistent with the Commission
Interpretation on Proxy Voting Advice, the final amendments are
designed to further clarify the potential implications of Rule 14a-9
for proxy voting advice specifically, and to help ensure that proxy
voting advice businesses' clients are provided with the material
information they need to make fully informed decisions.
Although we acknowledge commenters' concerns around the potential
for heightened litigation risk associated with the proposed changes to
Rule 14a-9,\452\ we reiterate that Rule 14a-9 is grounded in
materiality, and amending the rule to include updated examples of
potentially misleading disclosure, depending on the facts and
circumstances, in no way changes its application or scope. The
amendment to Rule 14a-9 does not broaden the concept of materiality
\453\ or create a new cause of action, as some have suggested. As
discussed above, the Commission has long taken the view that proxy
voting advice generally constitutes a ``solicitation.'' \454\ Because
Rule 14a-9 applies to all solicitations, even those made in reliance on
an exemption from the information and filing requirements of the
federal proxy rules, proxy voting advice businesses and other market
participants should have been on notice that Rule 14a-9 applies to
proxy voting advice. The amendment also does not make ``mere
differences of opinion'' actionable under Rule 14a-9.\455\ Rather, it
further clarifies what has long been true about the application of Rule
14a-9 to proxy voting advice and, more generally, proxy solicitations
as a whole: No solicitation may contain any statement which, at the
time and in light of the circumstances under which it is made, is false
or misleading with respect to any material fact, or which omits to
state any material fact necessary in order to make the statements
therein not false or misleading.\456\ The addition of paragraph (e) to
the Note to Rule 14a-9, the substance of which has not been updated for
over six decades, to account for contemporary market practices
(including the prevalent use of proxy voting advice by institutional
investors and others),\457\ further clarifies that proxy voting advice
is subject to Rule 14a-9. The addition of paragraph (e) also
underscores that the examples are among the types of information that
may provide material context without which, depending on the facts and
circumstances, the proxy voting advice may run afoul of the rule. The
examples are illustrative only, and are not intended to be exhaustive
or absolute, or supersede the materiality principle or the facts and
circumstances analysis required in each particular case.
---------------------------------------------------------------------------
\452\ See, e.g., letters from C. Icahn; CalPERS; CIRCA; Elliott
I; Glass Lewis II; MFA & AIMA; Minerva I.
\453\ See letter from CalPERS.
\454\ See supra notes 149 through 154 and accompanying text.
\455\ See, e.g., letter from PRI II (``[The Commission] . . .
should . . . narrow the scope of the Proposed Rule to avoid chilling
litigation over proxy advice, for example, by ensuring that Rule
14a-9 does not cover the content on recommendations or mere
differences of opinion between management and proxy firms.'').
\456\ See Rule 14a-9.
\457\ See supra note 432.
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As noted above, however, we have determined not to adopt the
proposed example related to the use of standards that materially differ
from relevant standards or requirements that the Commission sets or
approves. To the extent that a proxy voting advice business does not
make clear to its clients that it is making a negative voting
recommendation based on its own criteria, notwithstanding that the
registrant has complied with the applicable standards established or
approved by the Commission, there is a risk that the proxy voting
advice business's clients may misunderstand the basis for the proxy
voting advice business's recommendation. The proposed amendment
regarding use of standards or requirements in proxy voting advice that
materially differ from relevant standards or requirements that the
Commission sets or approves was designed to help ensure that proxy
voting advice businesses' clients are provided the information they
need to make a ``fair appraisal'' \458\ of the recommendation and to
clarify the potential implications of Rule 14a-9.
---------------------------------------------------------------------------
\458\ See supra note 424.
---------------------------------------------------------------------------
Nevertheless, we understand the concerns expressed by some
commenters who asserted that the perceived lack of clarity regarding
the scope of the proposed clause ``or use of standards that materially
differ from relevant standards or requirements that the Commission sets
or approves,'' which was not discussed in the earlier guidance, may
increase legal uncertainty and litigation risks to both proxy voting
advice businesses and registrants, and that the lack of legal certainty
could affect the quality of analyses provided by proxy voting advice
businesses.\459\ We continue to believe that there could well be
occasions where, for example, the omission or distortion of essential
context from a proxy voting advice business's explanation of its
methodologies may be misleading under a materiality principle and the
particular facts and circumstances, such that a shareholder's ability
to make an informed voting decision is subverted. However, we also
believe that the existing principles of Rule 14a-9 are sufficiently
robust to encompass such a situation, which ultimately will come down
to a question of facts and circumstances. For that reason, we do not
think it is necessary to memorialize this potentially nuanced situation
with an illustrative example that, because it is by definition a
generalization, could create more confusion than clarity.
---------------------------------------------------------------------------
\459\ See, e.g., letters from C. Icahn; CalPERS; Glass Lewis II;
MFA & AIMA.
---------------------------------------------------------------------------
Therefore, we are adopting the amendment to Rule 14a-9 without this
example. However, this does not negate the fact that Rule 14a-9's
prohibition against materially misleading solicitations applies to
proxy voting advice where the disclosures are so materially deficient
that the investor could not be reasonably expected to understand that
the proxy voting advice business is applying a different standard to
its analysis, and therefore may vote based on such misapprehension. For
similar reasons, we are also not electing to expand the list of
examples beyond
[[Page 55122]]
what was proposed, as suggested by some commenters.\460\
---------------------------------------------------------------------------
\460\ See, e.g., letters from BRT; CCMC; CII IV; Exxon Mobil;
NAM; Nareit; Nasdaq; TechNet.
---------------------------------------------------------------------------
E. Compliance Dates
The Commission proposed a one-year transition period after the
publication of the final rule in the Federal Register to give affected
parties sufficient time to comply with the proposed new requirements,
including the development of any necessary processes and systems.\461\
---------------------------------------------------------------------------
\461\ See Proposing Release at 66539.
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Some commenters, however, thought that a longer transition period
would be necessary given their expectation that affected parties,
particularly proxy voting advice businesses, would need to devote
significant time and resources in order to bring their systems and
processes into compliance.\462\ As an alternative, two commenters
suggested extending the transition period to eighteen months.\463\
Other commenters recommended that small entities be given an extended
timeframe for compliance.\464\ One commenter also suggested that the
Commission consider a phased implementation schedule that would not
interfere with the peak of proxy season that typically occurs during
the spring each year.\465\
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\462\ See letters from CalPERS; CII IV; Felician Sisters II;
Glass Lewis II; Good Shepherd; IASJ; Interfaith Center II; New York
Comptroller II; St. Dominic of Caldwell.
\463\ See letters from CII IV; Glass Lewis II (additionally
recommending that the effectiveness of final rules be delayed
pending resolution of ongoing litigation that could impact the
statutory and constitutional bases for the rulemaking).
\464\ See letters from Felician Sisters II; Good Shepherd; IASJ;
Interfaith Center II; St. Dominic of Caldwell.
\465\ See letter from Glass Lewis II.
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We continue to believe that a transition period for compliance with
new Rule 14a-2(b)(9) is appropriate. Based on commenter feedback, as
well as the Commission's interest in limiting unnecessary disruptions
during the peak proxy season, proxy voting advice businesses subject to
the final rules will not be required to comply with the amendments to
Rule 14a-2(b)(9) until December 1, 2021. We believe that the length of
the transition period will accommodate the need of affected parties to
have sufficient time to prepare for compliance with Rule 14a-2(b)(9)
while also recognizing that our adoption of a principles-based
framework should allow proxy voting advice businesses and other parties
the flexibility to leverage their existing practices and mechanisms to
more efficiently integrate their operations with the new requirements.
The compliance date for Rule 14a-2(b)(9) is intended to sufficiently
precede the typical commencement of the proxy season for 2022, so as to
minimize disruption to the normal functioning of the proxy system.
However, we welcome early compliance with the amendment. We note that
the transition period only applies with respect to the amendments to
Rule 14a-2(b)(9) and does not extend to the amendments to Rule 14a-1(l)
and Rule 14a-9. Because these other amendments codify existing
Commission interpretations and guidance, and do not impose new
obligations that necessitate significant time for preparation, we do
not believe the same rationale for a transition period exists.
III. Other Matters
If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application. For example, the amendments to Rule
14a-2(b)(9)(i) operate independently from the amendments to Rule 14a-
2(b)(9)(ii), and both provisions operate independently from the
amendments to Rules 14a-1(1) and 14a-9.
Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these rules a ``major rule,'' as
defined by 5 U.S.C. 804(2).
IV. Economic Analysis
The discussion below addresses the economic effects of the
amendments, including their anticipated costs and benefits, as well as
the likely effects of the amendments on efficiency, competition, and
capital formation.\466\ We also analyze the potential costs and
benefits of reasonable alternatives to the amendments. Where
practicable, we have attempted to quantify the economic effects of the
amendments; however, in certain cases, we are unable to do so because
either the necessary data are unavailable or certain effects are not
quantifiable. In the Proposing Release, we requested comment on our
analysis of these effects. A few commenters provided quantitative
estimates, and we have addressed and incorporated, where appropriate,
those estimates into our analysis below. We also provide qualitative
economic assessments for effects for which we are unable to provide
quantitative estimates.
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\466\ Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)]
directs the Commission, when engaging in rulemaking where it is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. Further, Section 23(a)(2) of the
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when
making rules under the Exchange Act, to consider the impact that the
rules would have on competition, 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.
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A. Introduction
We are adopting 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 on proxy voting advice
businesses satisfying certain additional disclosure and procedural
requirements. These conditions will require proxy voting advice
businesses to provide enhanced conflicts of interest disclosure. They
will also separately require proxy voting advice businesses to: (i)
Adopt and publicly disclose written policies and procedures reasonably
designed to ensure that the proxy voting advice business's proxy voting
advice is made available to registrants at or prior to the time when
such advice is disseminated to the proxy voting advice business's
clients; and (ii) adopt and publicly disclose written policies and
procedures reasonably designed to ensure that the proxy voting advice
business provides clients with a mechanism by which they can reasonably
be expected to become aware of a registrant's written statements about
the proxy voting advice in a timely manner before the shareholder
meeting. We also are codifying the Commission's interpretation that, as
a general matter, proxy voting advice constitutes a solicitation within
the meaning of Exchange Act Rule 14a-1(l). Finally, we are amending
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 material
information related to the proxy voting advice business's methodology,
sources of information, or conflicts of interest.
We have considered the economic effects of the final amendments,
including their effects on competition, efficiency, and capital
formation. The purpose of the final amendments is to help ensure that
investors who use proxy voting advice have access to more complete,
accurate, and transparent information and are able to benefit from
[[Page 55123]]
a robust discussion of views--similar to what is possible at a meeting
where shareholders and other parties are physically attending and
participating--when making their voting decisions. We generally expect
the final amendments to reduce information asymmetries between proxy
voting advice businesses and their clients by eliciting more tailored
and comprehensive disclosure of conflicts of interest and by
facilitating client access to more complete information on matters that
are the subject of proxy voting advice. We also believe that the final
amendments may mitigate certain agency costs associated with the
clients' use of proxy advice voting businesses and thereby facilitate
more efficient use of the services provided by such businesses while
preserving their economies of scale.\467\
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\467\ Researchers define a contract under which one or more
persons (the principals) engage another person (the agent) to
perform some service on their behalf as an agency relationship.
``Agency costs'' in the principal-agent relationship consist of: The
cost to the principal of monitoring the agent to limit aberrant
activities; ``bonding'' costs to the agent to reassure the client
that the agent will not take certain actions that would harm the
principal or that the principal will be compensated if the agent
takes such actions; and the ``residual loss,'' or the loss of
welfare to the principal from the divergence of activities by the
agent from the interests of the principal. See Michael C. Jensen &
William H. Meckling, Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure, 3 J. Fin. Econ. 305 (1976).
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As a threshold matter, the relationship between a proxy voting
advice business client and a proxy voting advice business is an example
of an agency relationship. As in any principal-agent relationship, the
agent (the proxy voting advice business) may not always act in the best
interests of the principal (the client).\468\ The conditions imposed on
proxy voting advice businesses by the final amendments may reduce the
costs that arise from this divergence of interests. For example, by
requiring proxy voting advice businesses to provide clients with more
tailored and comprehensive conflict of interest disclosure than is
currently required, the amendments may make it possible for proxy
voting advice businesses to more credibly reassure their clients that
relevant conflicts have been disclosed, and potentially addressed (by
reducing the ability of proxy voting advice businesses to obfuscate
information about conflicts or selectively disclose conflicts), than is
otherwise achieved by the current system of conflict disclosure. In
addition, to the extent that relevant conflicts are better understood
by a client as a result of the more tailored and comprehensive
disclosure, the client will be better able to assess the objectivity of
proxy voting advice against the influence of potentially competing
interests and thus to monitor proxy voting advice business services.
Moreover, by separately ensuring that registrants receive notice of
proxy voting advice and a proxy voting advice business provides clients
with a mechanism by which they can become more readily aware of
registrant responses to that advice, the final amendments may reduce
the costs clients might otherwise incur to acquire information relevant
to assessing proxy voting advice and increase the efficiency of this
segment of the proxy system. At the same time, the final amendments
will likely impose certain additional direct costs on proxy voting
advice businesses which may offset this reduction in agency costs.
However, as we detail in later sections, we expect the flexibility
afforded by the final amendments and current practices of at least the
three major proxy voting advice businesses in the United States will
serve to limit those direct costs.
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\468\ For example, agents may benefit by enhancing revenues,
decreasing costs, both, or by taking actions other than those that
are in the principals' best interest. Id.
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As explained in more detail below, many of the economic effects of
the amendments cannot be reliably quantified. Consequently, while we
have attempted to quantify the economic effects expected from the
amendments wherever practicable, much of the discussion remains
qualitative in nature. Where we are unable to quantify the potential
economic effects of the final amendments, we provide a qualitative
assessment of these effects as well as the potential impacts of the
amendments on efficiency, competition, and capital formation.
1. Overview of Proxy Voting Advice Businesses' Role in the Proxy
Process
Every year, retail investors, institutional investors, and
investment advisers face decisions on whether and how to vote on a
significant number of matters that are subject to a proxy vote.\469\
These matters range from the election of directors and the approval of
equity compensation plans to shareholder proposals submitted under
Exchange Act Rule 14a-8. In addition to matters presented at a
company's annual shareholder meeting, investors and investment advisers
also make 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, investment advisers and institutional
investors play a large role in proxy voting for various reasons,
including because institutional investors and clients of investment
advisers individually or collectively own a large aggregate fraction of
many U.S. public companies.\470\ We understand that voting can be
resource intensive for investors that hold or investment advisers that
manage diversified portfolios. It involves organizing proxy materials,
performing due diligence on portfolio companies and matters to be voted
on, determining whether and how votes should be cast, and submitting
proxy cards to be counted. Proxy voting advice businesses offer to
perform a variety of tasks related to voting, including the following:
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\469\ 17 CFR 240.14a-8; see, e.g., letters from Barbara Novick,
Vice Chairman, BlackRock, Inc. (Feb. 3, 2020) (``BlackRock'')
(``BlackRock acts as a fiduciary for its clients. In this capacity,
we engage with thousands of companies globally and we vote in
proxies at over 16,000 company meetings annually.''); NYC
Comptroller (``For the year ending June 30, 2019, my office voted on
126,775 individual ballot items at 13,122 shareowner meetings in 86
markets around the world. . . .''); see also letter in response to
the SEC Staff Roundtable on the Proxy Process from Ohio Public
Retirement (Dec. 18, 2018) (``OPERS receives in excess of 10,000
proxies in any given proxy season.'').
\470\ See supra note 10 and accompanying text. See also
Broadridge & PwC, 2019 Proxy Season Review, ProxyPulse (2019), at 1,
available at https://www.broadridge.com/_assets/pdf/broadridge-proxypulse-2019-review.pdf (estimating that institutions own 70% of
public company shares) (``Broadridge PwC 2019 Report''); Charles
McGrath, 80% of Equity Market Cap Held by Institutions, Pensions &
Investments (Apr. 25, 2017), available at https://www.pionline.com/article/20170425/INTERACTIVE/170429926/80-of-equity-market-cap-held-by-institutions.
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Analyze and make voting recommendations on the matters
presented for shareholder vote and included in the registrants' proxy
statements;
Execute proxy votes (or voting instruction forms) in
accordance with their benchmark policy, a specialty policy, or a custom
policy; \471\
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\471\ See letter from ISS.
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Assist with the administrative tasks associated with
voting and keep track of the large number of voting determinations; and
Provide research and identify potential risk factors
related to corporate governance.
We also understand that, in the absence of the services offered by
proxy voting advice businesses, investment advisers and other clients
of these businesses may expend considerable resources to independently
conduct the work necessary to analyze, recommend, and make voting
determinations. As a consequence, we understand that some
[[Page 55124]]
investment advisers and institutional investors find it efficient to
hire proxy voting advice businesses to perform various voting and
voting-related services, rather than performing them in-house.\472\
Proxy voting advice businesses generally are able to capture
significant economies of scale that are not available to many
investment advisers and institutional investors on an individual
basis.\473\
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\472\ See Concept Release at 42983.
\473\ See Chester S. Spatt, Proxy Advisory Firms, Governance,
Market Failure, and Regulation 7 (2019), available at https://www.milkeninstitute.org/sites/default/files/reports-pdf/Proxy%20Advisory%20Firms%20FINAL.pdf (``Spatt (2019)''). Commenters
also suggest that proxy voting advice businesses are an economically
efficient means of collecting information and analyzing voting
issues. See, e.g., letter from CEC.
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In 2007, the U.S. Government Accountability Office (``GAO'') found
that among 31 institutions, including mutual funds, pension funds, and
asset managers, large institutions relied less than small institutions
on the research and recommendations offered by proxy voting advice
businesses. Large institutions 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.\474\
In contrast, small institutions 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.\475\ The findings of a 2016 GAO study that surveyed 13
institutional investors were similar.\476\
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\474\ See U.S. Gov't Accountability Office, GAO-07-765, Report
to Congressional Requesters, Corporate Shareholder Meetings: Issues
Relating to the Firms that Advise Institutional Investors on Proxy
Voting, 17-18 (2007), available at https://www.gao.gov/new.items/d07765.pdf (``2007 GAO Report''); see also Letters in response to
the SEC Staff Roundtable on the Proxy Process from BlackRock (Nov.
16, 2018) (``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
(Jan. 2, 2019) (``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.''); Transcript of the Roundtable on the Proxy
Process 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.'').
\475\ 2007 GAO Report, supra note 474, at 17-18.
\476\ See 2016 GAO Report, supra note 141, at 2.
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As discussed in Section I above, proxy voting advice businesses
have the potential to influence many investors' voting decisions and,
as a result, the overall vote. Clients of proxy voting advice
businesses number in the thousands, and they exercise voting authority
or influence over a sizable number of shares that are voted annually.
Commenters described the informational benefits that clients derive
from proxy voting advice \477\ and how proxy voting advice businesses
enable them to make informed voting determinations on behalf of
investors and beneficiaries.\478\
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\477\ See letter from Kenneth A. Bertsch, Executive Director,
and Jeffrey P. Mahoney, General Counsel, Council of Inst. Investors
(Feb. 20, 2020) (``CII VIII'').
\478\ See, e.g., letters from MFA & AIMA; New York Comptroller
II.
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To the extent that proxy voting advice businesses influence voting
decisions, they also may indirectly impose certain costs on
shareholders. Recent theoretical research on the role of proxy voting
advice suggests that the presence of proxy voting advice businesses may
induce investors to over-rely on information produced by these
businesses to make voting decisions. This over-reliance arises because
shareholders do not internalize the benefits for other shareholders of
their own independent research of matters put to a vote. Instead
shareholders find it privately efficient to outsource the analysis of
voting decisions to proxy voting advice businesses.\479\ Additionally,
if proxy voting advice businesses significantly influence voting,\480\
registrants and other market participants may seek to engage with proxy
voting advice businesses rather than engaging directly with investors
or registrants. Thus, the presence of proxy voting advice businesses
may negatively affect the ability of certain investors to engage with
and influence registrants and other investors. On the other hand, from
a transactions cost perspective, being able to engage with a few large
and important intermediaries, compared to engaging bi-laterally with
multiple shareholders, may be more efficient for registrants and
investors.
---------------------------------------------------------------------------
\479\ 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 so the applicability of their results is limited by
the extent to which investors have goals other than, or in addition
to, share value maximization. The authors further assume that proxy
advice is provided by a single monopolistic proxy advisory firm, and
that 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 shows that proxy advisory services are valuable when
ownership is sufficiently dispersed. In contrast, proxy advisory
services are likely to have negative effects for companies with more
concentrated ownership because they discourage independent
information acquisition by shareholders. However, their results also
imply that when ownership is very concentrated shareholders again
find proxy advisory services to be valuable because each
shareholder's vote is more likely to be pivotal.
\480\ See infra notes 481 and 482.
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Although the economic incentives to concentrate voting power and
influence in proxy voting advice businesses are strong, research on the
role of proxy voting advice businesses in influencing voting, however,
has produced a wide range of results. For example, a number of studies
suggest that proxy voting advice has substantial influence on proxy
votes,\481\ while others suggest a more limited influence.\482\ We note
that existing academic studies examine the relationship between proxy
votes and proxy voting advice businesses' recommendations based on
benchmark policies. The relationship between proxy votes cast and
voting recommendations provided to clients using clients' custom
policies has not, to date, been the subject of academic study.\483\
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\481\ See, e.g., Cindy R. Alexander et al., Interim News and the
Role of Proxy Voting Advice, 23 Rev. Fin. Stud. 4419, 4422 (2010);
Alon Brav et al., Picking Friends Before Picking (Proxy) Fights: How
Mutual Fund Voting Shapes Proxy Contests (Columbia Bus. Sch.,
Research Paper No. 18-16, 2019) at 4, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3101473 (``Brav et al.
(2019)''); James R. Copland, David F. Larcker, & Brian Tayan, The
Big Thumb on the Scale: An Overview of the Proxy Advisory Industry
(Stanford Bus. Sch. Closer Look Series, May 30, 2018) at 3,
available at https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-72-big-thumb-proxy-advisory.pdf;
James R. Copland, David F. Larcker, & Brian Tayan, Proxy Advisory
Firms: Empirical Evidence and the Case for Reform, Manhattan
Institute (May 2018) at 6, available at https://media4.manhattan-institute.org/sites/default/files/R-JC-0518-v2.pdf (``Copland et al.
(2018)''); Albert Verdam, An Exploration of the Role of Proxy
Advisors in Proxy Voting (Working Paper, 2006) at 23, available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=978835 (``Verdam
(2006)''); See letter from Chong Shu, University of Southern
California, Marshall School of Business (Jun. 22, 2020).
\482\ See Stephen Choi, Jill Fisch, & Marcel Kahan, The Power of
Proxy Advisors: Myth or Reality?, 59 Emory L.J. 869, 905-06 (2010).
See also Brav et al. (2019), supra note 481, at 35. The authors find
that larger mutual fund families cast votes ``in ways completely
independent from what are recommended by the advisors.''
\483\ Commenters stated that a large majority of proxy votes are
cast by proxy advice business clients who provide custom policies to
proxy voting advice businesses and, in return, receive customized
voting recommendations based on these policies. See letter from ISS.
To our knowledge, however, no academic study examines the relation
between proxy votes and the voting recommendations provided under
the client's custom policies. It is our understanding that clients
who receive voting recommendations based on custom policies also
receive the proxy voting advice business's benchmark reports.
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[[Page 55125]]
Research on the role of proxy voting advice businesses in proxy
voting has also 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,\484\ producing reports that contain
inaccuracies, and utilizing one-size-fits-all methodologies when
evaluating a diverse array of registrants or when providing services to
a diverse array of clients.\485\
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\484\ 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
at 42989. As a result, some proxy voting advice businesses provide
advice regarding a registrant to their institutional investor
clients on matters for which they may also provide consulting
services to the registrant. One commenter submitted research that
attempts to identify and quantify the impact of conflicts of
interest on recommendations and the effect of competition between
proxy voting advice businesses on the likelihood of biased
recommendations. The research finds that competition reduces
recommendations in favor of management, and that biased
recommendations have negative effects on registrants. The ability to
identify the provision of consulting services and to measure biases
in recommendations, however, represents a significant data challenge
for the estimation of the purported effects. See letter from Prof.
Li.
\485\ See letter from CCMC.
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To assess the quality of voting advice, studies have sought to
examine stock market reactions to registrants' announcements that they
will adopt policies consistent with proxy voting advice businesses'
recommendations.\486\ These studies hypothesize that the value of such
policies should be impounded in stock prices, and if investors expect
adoption of a particular policy to increase the value of a registrant,
an announcement that the registrant plans to adopt the policy should be
associated with a positive stock price reaction. This reasoning assumes
clients aim to increase a registrant's share price and that proxy
voting advice businesses tailor voting recommendations to achieve this
aim. Proxy voting advice businesses and certain of their clients,
however, may have goals other than, or in addition to, maximizing the
current value of a registrant's shares. Furthermore, the attribution of
stock price reactions to the adoption of policies by a registrant may
be challenging due to multiple announcements and other information
about the registrant that may be released concurrently. Together, these
limitations make it difficult for researchers to conclusively infer
recommendation quality from stock market reactions to implementation of
proxy voting advice business recommendations.\487\
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\486\ See generally David F. Larcker, Allan L. McCall, & Gaizka
Ormazabal, Outsourcing Shareholder Voting to Proxy Advisory Firms,
58 J.L. & Econ. 173 (2015) (finding 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).
\487\ Proxy voting advice business clients may have goals other
than, or in addition to, maximizing the value of a registrant's
shares, or these clients may have investment objectives that would
not be achieved solely on the basis of a positive market reaction.
See Spatt (2019), supra note 473, at 4; Patrick Bolton et al.,
Investor Ideology (Nat'l Bureau of Econ. Research, Working Paper No.
25717, 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); Copland et al.
(2018), supra note 481, at 6; Verdam (2006), supra note 481, at 12.
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2. Commenter Concerns Regarding the Rule's Economic Justification
In response to the Proposing Release, commenters expressed a range
of views regarding the rule's economic justification. Some commenters
asserted that there are failures in the market for proxy advice that
justify the final rule.\488\ In addition to a variety of anecdotal
evidence, some commenters provided surveys of registrants,\489\
corporate governance professionals,\490\ and retail investors \491\
that indicated concerns about factual inaccuracies and conflicts of
interest in the proxy voting process.
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\488\ See, e.g., letters from CEC; BPC; Mylan; Exxon Mobil;
Nareit; ACCF; BRT; Timothy M. Doyle (Feb. 3, 2020) (``T. Doyle'');
CGC; State Street; Nasdaq; SCG; Charter; NAM; J. Ward; BIO;
Christopher A. Iacovella, Chief Executive Officer, American
Securities Association (Feb. 3, 2020) (``ASA''); Shareholder
Advocacy; Michael Hietpas (Feb. 3, 2020) (``M. Hietpas''); John
Endean, President, American Business Conference (Feb. 19, 2020)
(``ABC'').
\489\ See letter from Nasdaq.
\490\ See letter from SCG.
\491\ See letter from J.W. Verret, Associate Professor of Law,
George Mason University Antonin Scalia School of Law (Jan. 22, 2020)
(``Prof. Verret'') (updating prior Spectrem survey results). One
commenter disputed the methodology used in the survey of retail
investors, claiming it used leading questions and ultimately showed
that retail investors are generally uninformed about the proxy
voting advice market. See letter from Prof. Coates.
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Other commenters stated, generally, that there is no principal-
agent problem or other market failure and that the proposed rule's
economic analysis failed to describe or provide demonstrable evidence
of a problem in the market for proxy advice that cannot be solved via
contractual arrangements in the private sector, other market based
mechanisms, or existing Commission rules (e.g., Rule 206(4)-6 under the
Investment Advisers Act).\492\ For example, one commenter disputed the
claims cited in the Proposing Release that proxy voting advice contains
inaccuracies or errors significant enough to require regulatory
intervention, stating that proxy voting advice businesses ``have every
incentive to conduct credible research and provide accurate
recommendations.'' \493\ Another commenter provided analysis showing
that two proxy voting advice businesses are more likely to recommend
their clients vote with management than a typical investor is to vote
with management, casting doubt on claims that proxy voting advice
businesses tend to encourage shareholders to oppose management
proposals.\494\ Another commenter provided independent analysis of the
dynamics of proxy vote recommendations, showing that they change over
time in response to events
[[Page 55126]]
and new information, suggesting they are not ``monolithic.'' \495\
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\492\ See, e.g., letters from Segal Marco II; TRP; PRI II;
ProxyVote II; Laura Chappel, Chief Executive, Brunel Pension
Partnership Limited (Feb. 3, 2020) (``Brunel''); Michael J. Clark,
Founder and Director, Ario Advisory (Feb. 3, 2020) (``Ario''); CII
IV; Prof. Coates; Kevin Thomas, Chief Executive Officer, Shareholder
Association for Research and Education (Jan. 30, 2020) (``SHARE
II''); Louise Davidson, Chief Executive Officer, Australian Council
of Superannuation Investors (Jan. 31, 2020) (``ACSI''); BMO; Proxy
Insight (Jan. 31, 2020) (``Proxy Insight''); Elliott I; Better
Markets; New York Comptroller II; AFL-CIO II; Joel Schneider, Chair,
Corporate Governance Committee, Dimensional Fund Advisors (Feb. 3,
2020) (``Dimensional''); Ron Baker, Executive Director, Colorado
Public Employees' Retirement Association (Feb. 3, 2020) (``Colorado
PERA''); Ashbel C. Williams, Executive Director & CIO, State Board
of Administration of Florida (Feb. 3, 2020) (``Florida Board'');
David Villa, Executive Director & Chief Investment Officer, et al.,
State of Wisconsin Investment Board (Feb. 3, 2020) (``SWIB''); CFA
Institute I; CIRCA; AllianceBernstein; LA Retirement; Glass Lewis II
(noting that no market failure is identified in the release and that
other jurisdictions' regulators, including ESMA, have concluded that
there is no market failure in the proxy voting advice business
industry); ISS; Michael Passoff, CEO, Proxy Impact (Feb. 3, 2020)
(``Proxy Impact''); Kenneth A. Bertsch, Executive Director, and
Jeffrey P. Mahoney, General Counsel, Council of Inst. Investors
(Feb. 4, 2020) (``CII V''); C. Icahn; ValueEdge I; CII VIII. See
also IAC Recommendation (stating that, rather than citing reliable
evidence of material problems with proxy voting advice businesses,
the SEC asserts that problems ``may'' or ``could'' exist, based on
claims from private interests (who are biased in favor of issuers)
that problems exist).
\493\ See letter from New York Comptroller II. See also letter
in response to the SEC Staff Roundtable on the Proxy Process from
CII (stating that ``[p]roxy advisers' business model depends on
factual accuracy and their incentives are thus aligned with issuers
and institutional investors alike.'').
\494\ See letter from Proxy Insight.
\495\ See letter from PRI II.
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One commenter suggested that there is a different source of market
failure inherent to the proxy voting process and proxy voting advice
businesses stemming from the collective action problem inherent in
shareholder voting.\496\ According to the commenter, investors do not
value expending resources to determine their position on a given proxy
vote because, on the margin, their vote does not matter and they do not
fully internalize all of the benefits associated with any resources
they do expend.\497\ The commenter further asserts that proxy voting
advice businesses, in turn, can therefore only charge modest fees for
their services, which leads them to be resource constrained in
performing their own research. Thus, according to the commenter, this
arrangement leads to voting recommendations that are not adequately
informed or precise, and thus imposes negative externalities on
shareholders. The commenter argues that, because market forces are
unable to improve the quality of voting recommendations and reduce
these externalities, there is a need for regulatory action.\498\
Another commenter offered a different perspective, arguing instead that
proxy voting advice businesses represented a private market solution to
shareholders' collective action problem, rendering regulatory
intervention unnecessary.\499\ Other commenters posited that the
underlying concentration among proxy voting advice businesses and
conflicts of interest are the result of past regulatory action that
created demand for the services of proxy voting advice businesses.\500\
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\496\ See letter from B. Sharfman I. See also letter from Bryce
C. Tingle, N. Murray Edwards Chair in Business Law, Faculty of Law,
University of Calgary (Jan. 31, 2020) (``Prof. Tingle'') (similarly
asserting that both fund managers and proxy voting advice business
are not incentivized to expend significant resources in producing
and evaluating voting advice, but without attributing this lack of
incentives to a collective action problem on the part of
shareholders.).
\497\ Academic research has shown, theoretically, that the
inability of shareholders to fully internalize the benefits of
developing an informed position on matters put to a shareholder vote
can cause shareholders to over-rely on proxy voting advice under
certain conditions. See supra note 479.
\498\ See letter from B. Sharfman I.
\499\ See letter from Glass Lewis II.
\500\ See, e.g., letter from P. Mahoney and J.W. Verret.
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We believe that the important role proxy voting advice businesses
currently play in facilitating clients' participation in the proxy
process, as well as the importance of ensuring that clients have access
to more complete information regarding matters to be voted on, and the
material conflicts of interest proxy voting advice businesses may have,
support the final amendments. As discussed in Section I above, the
purpose of the amendments is to help ensure that investors who use
proxy voting advice have access to more transparent, accurate, and
complete information and benefit from a robust discussion of views--
similar to what is possible at a meeting where shareholders are
physically attending and participating--when making their voting
decisions, while minimizing costs or delays that could adversely affect
the timely provision of proxy voting advice. The amendments are
expected to reduce the costs incurred by clients of proxy voting advice
businesses in monitoring for conflicts of interest or acquiring
information relevant to assessing proxy voting advice. In this way, the
amendments should improve the overall efficiency associated with this
segment of the proxy system. Proxy voting advice businesses often act
as the intermediary for their clients' participation in the proxy
system, and the requirements of the rule will facilitate clients'
timely access to, and awareness of, more complete information prior to
voting. This has the potential to benefit not just those clients and
the immediate shareholders they serve but also investors in our public
markets more generally.
B. Economic Baseline
The baseline against which the costs, benefits, and the impact on
efficiency, competition, and capital formation of the final amendments
are measured consists of the current regulatory requirements applicable
to registrants, proxy voting advice businesses, 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 Market Practices
a. Proxy Voting Advice Businesses
Proxy voting advice businesses will be affected by the final
amendments. As the Commission has previously stated, voting advice
provided by a firm such as a proxy voting advice business 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.'' \501\
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\501\ See Commission Interpretation on Proxy Voting Advice at
47417.
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Several commenters noted that certain firms involved in the proxy
process do not supply research, analysis, and recommendations to
support the voting decisions of their clients.\502\ To the extent such
firms are not providing any voting recommendations and are instead
exercising delegated voting authority on behalf of their clients, we
agree that such services generally will not constitute ``proxy voting
advice'' under Rule 14a-1(l)(1)(iii)(A) and have adjusted our baseline
accordingly.\503\
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\502\ Specifically, commenters indicated that two additional
firms included in the set of affected proxy voting advice businesses
in the Proposing Release, ProxyVote Plus and Marco Consulting Group
did not advise investment advisers and institutional investors on
their voting determinations and would therefore not be affected by
the proposed amendments. See supra note 100 and accompanying text.
See also letters from Segal Marco II; ProxyVote II; CII IV.
\503\ See supra notes 170-173 and accompanying text.
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As of July 22, 2020, to our knowledge, the proxy voting advice
industry in the United States consists of three major firms: ISS, Glass
Lewis, and Egan-Jones.
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.\504\ 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).\505\ As of April 2020, ISS had nearly 2,000
employees in 30 locations, and covered approximately 44,000 shareholder
meetings in 115 countries, annually.\506\ ISS states that it executes
about 10.2 million ballots annually on behalf of those clients
representing 4.2 trillion shares.\507\ ISS is registered with the
Commission as an investment adviser and identifies its
[[Page 55127]]
work as pension consultant as the basis for registering as an
adviser.\508\
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\504\ See 2016 GAO Report, supra note 141, at 6.
\505\ Id.
\506\ See About ISS, available at https://www.issgovernance.com/about/about-iss/ (last visited May 22, 2020). See also supra note
10.
\507\ See About ISS, available at https://www.issgovernance.com/about/about-iss/ (last visited May 22, 2020).
\508\ See Form ADV filing for ISS, available at https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=111940 (last accessed April 23,
2020). See also 2016 GAO Report, supra note 141, 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.\509\ As of April 2020, Glass Lewis had more than 380
employees worldwide that provide services to more than 1,300 clients
that collectively manage more than $35 trillion in assets.\510\ Glass
Lewis states that it covers more than 20,000 shareholder meetings
across approximately 100 global markets annually.\511\ Glass Lewis is
not registered with the Commission in any capacity.
---------------------------------------------------------------------------
\509\ Id. at 7.
\510\ See Glass Lewis Company Overview, available at https://www.glasslewis.com/company-overview/(last visited Apr. 26, 2020).
\511\ Id.
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Egan-Jones was established in 2002 as a division of Egan-
Jones Ratings Company.\512\ 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.\513\ As of September
2016, Egan-Jones' proxy research or voting clients mostly consisted of
mid- to large-sized mutual funds,\514\ and the firm covered
approximately 40,000 companies.\515\ Egan-Jones Ratings Company (Egan-
Jones' parent company) is registered with the Commission as a
Nationally Recognized Statistical Ratings Organization.\516\
---------------------------------------------------------------------------
\512\ See 2016 GAO Report, supra note 141, at 7.
\513\ Id.
\514\ Id.
\515\ 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.
\516\ 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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Of the three proxy voting advice businesses identified, ISS and
Glass Lewis are the largest and most often used for proxy voting
advice.\517\ We do not have access to general financial information for
ISS, Glass Lewis, and Egan-Jones such as annual revenues, earnings
before interest, taxes, depreciation, and amortization, and net income.
We also do not have access to client-specific financial information or
more general or aggregate information regarding the economics of the
proxy voting advice business.
---------------------------------------------------------------------------
\517\ See 2016 GAO Report, supra note 141, 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 letters in response to the SEC
Staff Roundtable on the Proxy Process from Center on Executive
Compensation (Mar. 7, 2019) (noting that there are ``two firms
controlling roughly 97% of the market share for such services'');
Society for Corporate Governance (Nov. 9, 2018) (``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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Several commenters stated that the economic analysis in the
Proposing Release failed to consider effects of the proposal on smaller
firms that provide proxy voting services, such as Investor Advocates
for Social Justice (``IASJ'').\518\ Further, commenters stated that the
final amendments could affect the propensity of non-U.S. firms to
compete with U.S. proxy voting advice businesses.\519\ Based on the
information available to the Commission,\520\ including comments on the
Proposing Release, we are not aware of smaller firms that currently
supply research, analysis, and recommendations in the United States to
support the voting decisions of their clients that would fall within
the definition of ``solicitation.'' We acknowledge that any smaller
firms or non-U.S. proxy voting advice businesses could be affected by
the final amendments to the extent they provide proxy voting advice on
registrants who have filed proxy materials with the Commission, or if
the final amendments affect their willingness to enter the market to
supply proxy voting advice in the United States.
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\518\ See letter from IASJ. We understand that this firm
typically does not make voting recommendations to its institutional
investor clients but rather assists those ``who seek a partner to
carry out their proxy voting.'' Id. To the extent a firm does not
make voting recommendations to its clients and is instead exercising
delegated authority on their behalf, it would not be engaged in a
``solicitation'' within the meaning of Rule 14a-1(l)(1)(iii)(A). See
supra notes 170-173 and accompanying text. Therefore, based on our
understanding of its current activities, this commenter (and others
engaged in similar conduct) would not appear to be subject to
compliance with Rule 14a-2(b)(9). See also letters from Felician
Sisters II; Good Shepherd; Interfaith Center II; ProxyVote II; Segal
Marco II; St. Dominic of Caldwell.
\519\ See letters from Minerva I; PIRC.
\520\ Our awareness of providers of proxy voting services may be
limited because firms that provide proxy voting services, including
proxy voting advice businesses, do not always engage in activities
that would require them to register with the Commission. See supra
Section I.
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In a principal-agent relationship, such as the relationship between
a proxy voting advice business and a client, to the extent that the
principals' and agents' interests are not perfectly aligned, agents can
expend resources to assure principals that they will act in the
principals' best interest. When agents operate in a competitive market
soliciting business from principals, they have an incentive to expend
resources to assure principals that they will act in the principals'
best interest, or risk putting themselves at a competitive
disadvantage.\521\ Where the agent's interest and the principal's
interest diverge, there can be a strong counterweight to this incentive
and where a relationship is multifaceted the agent may emphasize areas
of alignment and de-emphasize areas of conflict. In the proxy voting
advice market, certain practices by proxy voting advice businesses
serve as mechanisms to assure their clients that proxy voting advice
businesses will take actions that are in clients' best interest. All
three major proxy voting advice businesses have policies, procedures,
and disclosures in place that are intended to reduce clients' costs of
monitoring the businesses' behavior.\522\
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\521\ Agents have an incentive to expend resources to assure
principals that they will act in the principals' best interest as
long as the cost of providing the assurance is less than the value
of the assurance to principals.
\522\ See, e.g., letter from Glass Lewis II.
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Proxy voting advice businesses' reliance on information available
to all shareholders is one example of how current market practices may
mitigate agency costs. One commenter noted that facing the prospect of
having their work checked by clients can discipline proxy voting advice
businesses that might otherwise act based on conflicts of interest when
developing proxy advice.\523\ The same commenter included use of
publicly available information as a step it has taken to ``ensure
quality and minimize error in its published research.'' \524\ The three
major proxy voting advice businesses state that they base their
recommendations exclusively on information that is publicly available.
Relying on publicly available information to develop proxy advice
enables clients to validate the inputs that proxy voting advice
businesses provide, rather than expending effort to obtain proprietary,
and potentially commercially sensitive, information
[[Page 55128]]
directly from registrants or other sources.
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\523\ See letter from ISS.
\524\ See id.
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As part of our consideration of the baseline for the final rules,
we focus on two industry practices that are particularly relevant for
the new conditions in Rule 14a-2(b): Conflicts of interest disclosure
and procedures for engagement with registrants.
i. Conflict of Interest Disclosures
While the nature of potential conflicts related to revenues might
be different among the three proxy voting advice businesses, all three
proxy voting advice businesses have conflicts of interest policies and
make disclosures to clients disclosing the nature of potential
conflicts and the steps that they have taken to address them.\525\
These existing policies and disclosures are part of the economic
baseline for the amendments.
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\525\ See, e.g., letters from ISS; Glass Lewis II. See also
Egan-Jones Proxy Services Conflict of Interest Statement (Sept.
2019), available at https://www.ejproxy.com/media/documents/Egan-Jones_Proxy_Conflict-of-Interest_Sep-2019.pdf.
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For example, we understand that ISS has implemented policies and
procedures designed to prevent and manage conflicts that could arise
from the work of ISS' research and analytics teams (``Global
Research'') and the work of ISS Corporate Solutions (``ICS'') for
public companies.\526\ More specifically, Global Research prepares
proxy voting governance research, analyzes proxy issues, and provides
ratings on, and other assessments of, public companies for the benefit
of institutional investors. ICS provides advisory services, analytical
tools, and publications to registrants to enable registrants to improve
shareholder value and reduce risk. According to ISS, one of the primary
steps the firm has taken to prevent and manage this potential conflict
of interest is implementing a firewall with the goal of separating ICS
from ISS. ISS notes that it makes available to its institutional
clients information about the relationships between ICS and its clients
in a way that is intended not to alert Global Research analysts to the
possible existence of such relationships. ISS also notes that it adds a
legend to each global or domestic proxy analysis advising the reader of
the existence of ICS and offering ISS' clients the ability to learn
more about ICS and its clients. In addition, ISS indicates that it has
implemented a policy on the disclosure of significant relationships,
under which ISS provides clients with ``proactive visibility''
regarding a range of significant relationships within the client-facing
side of the ProxyExchange platform.\527\ ICS also discloses in all of
its contracts that ISS' status as a registered investment adviser (as
well as its internal policies and procedures) may require ISS to
disclose to ISS institutional clients ICS' relationship with the
registrant.
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\526\ See ISS, Best Practice Principles for Providers of
Shareholder Voting Research & Analysis: ISS Compliance Statement
(2017), available at https://www.issgovernance.com/file/duediligence/best-practices-principles-iss-compliance-statement-april-2017-update.pdf.
\527\ See ISS Policy Regarding Disclosure of Significant
Relationships, available at https://www.issgovernance.com/file/duediligence/Disclosure-of-Significant-Relationships.pdf (last
visited Apr. 27, 2020).
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We understand the other two major proxy voting advice businesses
also provide disclosure of potential conflicts of interest. Glass Lewis
notes that it provides disclosure of potential conflicts on the cover
of the relevant research report.\528\ This is intended to enable
clients and any other parties with access to a Glass Lewis report
(e.g., the media) to review potential conflicts at the same time they
review the research, analysis, and voting recommendations contained
therein. Egan-Jones also discloses its management of three categories
of potential conflicts--revenue, cost, and structural--to the
public.\529\
---------------------------------------------------------------------------
\528\ See Glass Lewis' Policies and Procedures for Managing and
Disclosing Conflicts of Interest (2019), available at https://www.glasslewis.com/wp-content/uploads/2019/11/GL-Policies-and-Procedures-for-Managing-and-Disclosing-Conflicts-of-Interest-050819-FINAL.pdf.
\529\ See Egan-Jones Proxy Services Conflict of Interest
Statement, available at https://ejproxy.com/media/documents/Egan-Jones_Proxy_Conflict-of-Interest_Sep-2019.pdf (last visited Apr. 27,
2020).
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Thus, it appears that all three major proxy voting advice
businesses have some level of conflict of interest disclosure policies
in place and provide such disclosure to affected parties. These
disclosures, which are intended to support the objectivity of voting
advice and the integrity of the voting process, may overlap to a
certain degree with the requirements in the final amendments. These
disclosure policies, however, vary in terms of structure and coverage
as well as the manner the in which the information is conveyed.
ii. Engagement With Registrants
The following section discusses existing proxy voting advice
business engagement with the subjects of proxy voting advice--one
avenue by which such businesses may signal to their clients that the
information underlying proxy voting advice is accurate, transparent,
and complete.
We understand that all three major proxy voting advice businesses
have certain policies, procedures, and disclosures in place intended to
assure clients that the voting advice they receive will be based on
accurate, transparent, and complete information. In some cases, proxy
voting advice businesses seek input from registrants to further these
objectives. All three of these proxy voting advice businesses offer
certain registrants some form of pre-release review of at least some of
their proxy voting advice reports, or the data used in their reports.
Also, all three such proxy voting advice businesses offer some
registrants access to proxy voting reports and offer mechanisms by
which registrants can provide feedback on those reports, in some cases
for a fee.
For example, ISS states that it may, in some circumstances, give
registrants, whether or not they are ICS clients, the right to review
draft research analyses, ratings, or other advisory research reports so
that ISS may correct factual inaccuracies before delivering final
voting advice. ISS acknowledges that review of draft analyses may
provide an opportunity for registrants to unduly influence those
analyses and reports. To avoid the appearance of impropriety, ISS
states that it generally offers registrants an opportunity to review a
draft proxy analysis, rating, or other research report only for the
purposes of verifying the factual accuracy of information. ISS further
states that it retains sole discretion whether to accept any change
recommended by the registrant. ISS's policies also govern changes to
analyses based on registrant feedback. According to ISS's Code of
Ethics, if the analyst changes the proposed voting recommendation or
other proposed conclusion, the proposed change must be reviewed by a
senior analyst and ISS will retain in its files the documents supplied
by the registrant detailing the factual inaccuracies.\530\
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\530\ See ISS Code of Ethics 7 (2020), available at https://www.issgovernance.com/file/duediligence/code-of-ethics-mar-2020.pdf.
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Glass Lewis introduced a ``Report Feedback Statement'' service in
2019 that has allowed companies to submit feedback on Glass Lewis
reports and have that feedback be transmitted directly to Glass Lewis
clients in the proxy research papers they receive.\531\ In addition to
these services, beginning in 2015, Glass Lewis started providing the
subjects of its research with its
[[Page 55129]]
Issuer Data Report, which details the key facts underlying the relevant
report for their review before the report is finalized. According to
Glass Lewis, materials provided are deliberately limited. Glass Lewis
has indicated that by providing the facts underlying the report, it can
benefit from registrant review without inviting debates about Glass
Lewis' methodology or what result that methodology should lead to in
the context of a particular recommendation. This service has been
available without a fee for several years and more than 1,400 companies
currently participate in it on an annual basis.\532\
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\531\ See Press Release, Glass Lewis, Glass Lewis Announces that
Company Opinions are Now Included With Research and Voting
Recommendations (Apr. 2, 2020), available at https://glasslewis.com/report-feedback-statement-included-with-research. See also Press
Release, Glass Lewis, Glass Lewis Launches Report Feedback Statement
Service (Mar. 14, 2020), available at https://glasslewis.com/glass-lewis-launches-report-feedback-statement-service.
\532\ See letter from Glass Lewis II.
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Egan-Jones provides several avenues for registrants to review and
correct any material errors found in its reports. Registrants may
obtain a ``draft,'' or pre-publication copy, of a report pertaining to
them in order to review it. If a registrant believes there is a
material error in an Egan-Jones report, the registrant may contact
Egan-Jones directly. In addition, major U.S. third-party proxy
solicitors participate in Egan-Jones' Research Preview program. Through
that program, proxy solicitors can supply draft copies of the research
regarding the registrant to the registrant, and convey appropriate
documentation to Egan-Jones to correct any errors found in the research
on behalf of the registrant.\533\
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\533\ See Egan-Jones Issuer Engagement, available at https://ejproxy.com/issuers (last visited Apr. 28, 2020).
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Although the three major proxy voting advice businesses offer
registrants opportunities to review proxy voting advice, existing
policies and procedures limit review in some respects. ISS, for
example, offers only ``eligible'' registrants an opportunity to review
draft proxy analyses and generally uses the S&P 500 constituent list to
determine eligibility. Moreover, even for eligible companies, ISS
provides an opportunity to review solely on a ``best-efforts''
basis.\534\ As noted above, Glass Lewis indicates that its registrant
review process is limited to pre-publication review of only the key
facts underlying each relevant report.\535\
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\534\ See ISS Draft Review Process for U.S. Issuers, available
at https://issgovernance.com/iss-draft-review-process-u-s-issuers/
(last visited Apr. 28 2020).
\535\ See supra note 532.
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Additionally, it is our understanding that some proxy voting advice
businesses currently include links to filings by registrants that are
the subject of proxy advice in their online platforms. These links
provide a means by which clients may access additional definitive proxy
materials that registrants may file in response to proxy voting advice.
Non-U.S. proxy voting advice businesses that are signatories to the
Best Practice Principles for Shareholder Voting Research have provided
information about their engagement with registrants.\536\ Based on
these public disclosures, we understand that levels of registrant
engagement vary across non-U.S. proxy voting advice businesses. For
example, the U.K.-based firm PIRC states that it provides pre-
publication drafts of proxy voting advice to registrants for some
jurisdictions as a courtesy, while France-based firm Proxinvest does
not.\537\ While acknowledging the practices of these non-U.S. proxy
voting advice businesses, this section focuses on the three major proxy
voting advice businesses that operate in the United States.\538\
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\536\ See BPP Group Signatory Statements, available at https://bppgrp.info/signatory-statements (last visited Apr. 29, 2020).
\537\ Id.
\538\ As noted in above, we are not aware of smaller firms that
currently supply research, analysis, and recommendations to support
the voting decisions of their clients that would fall within the
definition of ``solicitation.'' Thus we do not speculate as to how
smaller firms might engage with registrants.
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b. Clients of Proxy Voting Advice Businesses as Well as Underlying
Investors
Clients that use proxy voting advice businesses for voting advice
will be affected by the final rule amendments. In turn, investors and
other groups on whose behalf these clients make voting determinations
will be affected. One of the three major proxy voting advice
businesses--ISS--is registered with the Commission as an investment
adviser and as such, provides annually updated disclosure with respect
to its types of clients on Form ADV. Table 1 below reports client types
as disclosed by ISS.\539\
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\539\ See ISS Form ADV filing, supra note 508. ISS describes
clients classified as ``Other'' as ``Academic, vendor, other
companies not able to identify as above.''
Table 1--Number of Clients by Client Type
[as of March 28, 2020]
------------------------------------------------------------------------
Number of
Type of client \a\ clients \b\
------------------------------------------------------------------------
Banking or thrift institutions.......................... 195
Pooled investment vehicles.............................. 300
Pension and profit sharing plans........................ 170
Charitable organizations................................ 110
State or municipal government entities.................. 10
Other investment advisers............................... 960
Insurance companies..................................... 40
Sovereign wealth funds and foreign official institutions 10
Corporations or other businesses not listed above....... 70
Other................................................... 225
---------------
Total............................................... 2,095
------------------------------------------------------------------------
\a\ The table excludes client types for which ISS indicated either zero
clients or less than five clients.
\b\ 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), it
may indicate that it has fewer than five clients rather than reporting
the number of clients.
Table 1 illustrates the types of clients that utilize the services
of one of the largest proxy voting advice businesses. For example,
while investment advisers (``Other investment advisers'' in Table 1)
constitute a 46 percent plurality of clients for ISS, other types of
clients include pooled investment vehicles (14 percent) and pension and
profit sharing plans (eight percent). Other users of the services
offered by ISS include corporations, charitable organizations, and
insurance companies.\540\ Certain of these users of proxy voting advice
business services make voting determinations that affect the interests
of a wide array of individual investors, beneficiaries, and other
constituents.\541\
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\540\ Id.
\541\ One commenter argued that the economic analysis should
include more data and data analysis related to senior citizens since
they make up a large portion of the mainstream investor community.
In particular, the commenter suggested we include more data on the
proportion of total investors that are senior citizens and some
demographic analysis. We are sympathetic to the commenter's
suggestion regarding the importance of senior citizens as investors,
but we do not have data to perform the analysis the commenter
requested and none was provided by commenters. See letter from Jim
Martin, Chairman, et al., 60 Plus Association (Feb. 3, 2020) (``60
Plus''). We note that, to the extent the final rules improve the mix
of information available to shareholders when voting decisions are
made, they will benefit the investor community generally, including
senior citizen investors.
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c. Registrants
Registrants also will be affected by the final 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 with respect to those registrants are
subject to the
[[Page 55130]]
federal proxy rules.\542\ In addition, there are certain other
companies that do not have a class of equity securities registered
under Section 12 of the Exchange Act that 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.\543\
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\542\ Foreign private registrants 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 registrants that
have a class of equity securities registered under Section 12 of the
Exchange Act. Most asset-backed registrants are registered under
Section 15(d) of the Exchange Act and thus are not subject to the
federal proxy rules. Nine asset-backed registrants had a class of
debt securities registered under Section 12 of the Exchange Act as
of December 2018. As a result, these asset-backed registrants are
not subject to the federal proxy rules.
\543\ 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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As of December 31, 2018, we estimate that 5,758 registrants had a
class of securities registered under Section 12 of the Exchange
Act.\544\ As of the same date, there were approximately 20 companies
that did not have a class of securities registered under Section 12 of
the Exchange Act that filed proxy materials.\545\ 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.\546\ As of December 2018, we
identified 98 Business Development Companies (``BDCs'') that could be
subject to the final amendments.\547\ The summation of these estimates
yields 18,594 companies that may be affected to a greater or lesser
extent by the final amendments.\548\
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\544\ 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
registrants that filed Forms 20-F and 40-F and asset-backed
registrants that filed Forms 10-D and 10-D/A during calendar year
2018 with the Commission are excluded from this estimate. This
estimate excludes BDCs that filed Form 10-K in 2018.
\545\ We identify these issuers 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; 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 registrants 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 registrants 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).
\546\ 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.
\547\ BDCs are entities that have been issued an 814- reporting
number. Our estimate includes 88 BDCs that filed Form 10-K in 2018
as well as BDCs that may be delinquent or have filed extensions for
their filings. Our estimate excludes six wholly-owned subsidiaries
of other BDCs.
\548\ The 18,594 potentially affected registrants is the sum of:
(a) 5,758 registrants with a class of securities registered under
Section 12 of the Exchange Act; (b) 20 registrants without a class
of securities registered under Section 12 of the Exchange Act that
filed proxy materials; (c) 12,718 registered management investment
companies; and (d) 98 BDCs.
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The above estimates are an upper bound of the number of potentially
affected companies 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 18,594
potentially affected registrants mentioned above, 5,690 filed proxy
materials with the Commission during calendar year 2018.\549\ 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.\550\
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\549\ For details on the estimation of companies that filed
proxy materials with the Commission during calendar year 2018, see
supra note 544.
\550\ 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) one 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.
---------------------------------------------------------------------------
Whether or not proxy voting advice businesses permit registrants to
review draft proxy voting advice, all registrants are able to respond
to final proxy voting advice by filing additional definitive proxy
materials. However, as discussed in the Proposing Release, some
registrants have asserted that a large percentage of proxies are voted
within 24 to 48 hours of proxy voting advice being issued \551\ and
that it can be difficult for registrants to access and analyze the
proxy voting advice, formulate a response, and file the necessary
materials with the Commission within that time period.\552\ This is
consistent with feedback received from commenters, who also indicated
that registrants face time pressure in their efforts to communicate
their responses to proxy voting advice to shareholders prior to
votes.\553\ The Proposing Release included an analysis that estimated
the number of additional definitive proxy material filings in 2016,
2017, and 2018,\554\ and Commission staff subsequently refined the
process for identifying relevant filings and published a list of the
filings it identified in a memorandum to the public comment file.\555\
This list shows approximately 105, 93, and 90 filings in 2016, 2017,
and 2018, respectively. Further, in the Proposing Release, the staff
identified in a subset of additional definitive proxy material filings
in 2018, where data were available, the number of business days between
when a proxy voting advice business delivered proxy voting advice and
when the registrant filed additional definitive proxy
[[Page 55131]]
materials, and the number of business days until the planned
shareholder meeting. Based on this sample, staff estimated a median
value of three business days and an average value of 3.8 business days
between when a proxy voting advice business issues proxy voting advice
and when a registrant responds. Further, the median (average) number of
days between the registrant response and the shareholder meeting based
on the sample was 9.5 (10.3) business days.\556\
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\551\ See Proposing Release at 66545, n.235.
\552\ See id. at 66545, n.236. As we noted above, shareholders
have the ability to change their vote at any time prior to a
meeting, including as a result of a registrant filing supplemental
proxy materials in response to proxy voting advice. See supra note
373.
\553\ See, e.g., letters from Nareit; NAM; Exxon Mobil. See also
Proposing Release at 66533, n.136.
\554\ See Proposing Release at 66546, Table 2.
\555\ See Memorandum from the U.S. Securities and Exchange
Commission, Division of Economic Risk and Analysis, Regarding Data
Analysis of Additional Definitive Proxy Materials Filed by
Registrants in Response to Proxy Voting Advice (Jan. 16, 2020),
available at https://www.sec.gov/comments/s7-22-19/s72219-6660914-203861.pdf (``Data Analysis of Additional Definitive Proxy
Materials'').
\556\ See Proposing Release at 66546.
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A number of commenters interpreted our analysis in Table 2 of the
Proposing Release to indicate that the Commission took the view that
the ``concerns'' raised by registrants about errors or inaccuracies
reflected actual factual errors.\557\ One commenter questioned whether
Commission staff evaluated the merits of registrant claims presented in
the Proposing Release \558\ and supplied its own estimates of actual
error rates in proxy voting advice business research report based on
its own research,\559\ as well as on supplementary information made
available in the comment file.\560\
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\557\ Id. at Table 2.
\558\ See letter from CII I.
\559\ See letter from CII IV.
\560\ See letter from CII V. This commenter suggested that the
error rate implied by the Commission's classification in Table 2 of
the Proposing Release was 0.5% and that after correcting for
registrant assertions that appear to be in error, the rate is
reduced to 0.3%. The same commenter performed a case-by-case
analysis of claims they believed may have been classified as errors
in the Proposing Release's analysis, casting doubt on whether many
of them were actually related to factual errors, and concluded that,
after excluding analytical errors, which may just represent
differences of opinion, the actual error rate is only 0.06%.
---------------------------------------------------------------------------
In contrast, another commenter had a different critique of Table 2,
arguing that estimating error rates based on filings of additional
definitive proxy materials might actually underestimate the true error
rate because registrants who submit filings subject themselves to
potential liability under SEC Rule 14a-9.\561\
---------------------------------------------------------------------------
\561\ See letter from ACCF.
---------------------------------------------------------------------------
The method for identifying filings that contained registrant
concerns and classifying those concerns was detailed in the Proposing
Release and in the subsequent staff memorandum.\562\ Importantly, the
analysis set forth in the Proposing Release took no position on the
merits of responses. The analysis was intended to present how
registrants currently respond to proxy voting advice and the frequency
and timing of those responses and made no judgment as to whether the
concerns raised by registrants in their supplemental filings were
valid. Nor was the analysis intended to provide an ``error rate.''
Although we agree that reasonable readers might disagree in their
classification of registrant concerns, lack of agreement on
classification of specific responses does not change our assessment,
discussed below, that the final rules would benefit clients of proxy
voting advice businesses, and the proxy process as a whole, by
improving client access to registrant information and analysis. Indeed,
the fact that reviewers of additional definitive proxy materials may
differ both in how they identify registrant concerns and how they
classify those concerns supports the idea that clients would benefit
from having a mechanism available by which they can reasonably be
expected to become aware of registrant responses so they might form
their own view of the merits of those responses.
---------------------------------------------------------------------------
\562\ See Proposing Release at n.239. See also Data Analysis of
Additional Definitive Proxy Materials, supra note 555.
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2. Current Regulatory Framework
The economic baseline includes the current regulatory framework
that applies to proxy voting advice businesses. As explained in the
Proposing Release, 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.\563\ 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.\564\
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.\565\ Notwithstanding the exemptions,
these solicitations remain subject to Rule 14a-9, the antifraud
provisions of the federal proxy rules.\566\
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\563\ See Proposing Release at 66524.
\564\ See, e.g., Communications Among Shareholders Adopting
Release 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 . . . .'').
\565\ 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. Another exemption, Rule 14a-2(b)(3), generally exempts
proxy voting advice furnished by an advisor to any other person with
whom the advisor has a business relationship.
\566\ 17 CFR 240.14a-9.
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Proxy voting advice businesses typically rely upon the exemptions
in Rule 14a-2(b)(1) and (b)(3) to provide advice without complying with
the filing and information requirements of the proxy rules.\567\ The
existing conditions to these exemptions are 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.\568\ By contrast, the exemption in Rule 14a-
2(b)(1) does not currently require conflicts of interest disclosure.
Both exemptions 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 institutional investors.
---------------------------------------------------------------------------
\567\ See Commission Interpretation on Proxy Voting Advice at
47416 (discussing the ``two exemptions to the federal proxy rules
that are often relied upon by proxy advisory firms'').
\568\ 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).
---------------------------------------------------------------------------
Several commenters stated that the analysis in the Proposing
Release did not reflect requirements to address conflicts of interest
under existing law, including the regulatory scheme under the
Investment Advisers Act, as well as proxy voting advice business best
practices under the baseline.\569\ We recognize that, in addition to
the rules governing proxy solicitation, some proxy voting advice
businesses may be subject to other regulatory regimes.\570\
[[Page 55132]]
For example, one of the major proxy voting advice businesses, ISS, is
also a registered investment adviser, and as such, must eliminate or
make full and fair disclosure of all conflicts of interest to its
clients that might cause ISS to render proxy voting advice that is not
disinterested such that a client can provide informed consent to the
conflict.\571\ In addition, ISS has 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.\572\ Similarly, Egan-Jones is registered with the
Commission as a Nationally Recognized Statistical Rating Organization
(NRSRO). Registered NRSROs are required under Rule 17g-5 to disclose
conflicts of interest relating to maintenance or issuance of a credit
rating. However, these regulatory regimes serve distinct, though
overlapping, regulatory purposes.\573\
---------------------------------------------------------------------------
\569\ See letters from ISS; Glass Lewis II. See also IAC
Recommendation.
\570\ See Proposing Release at 66527, n.88; 66529, n.99.
\571\ See letter from ISS; see also Standard of Conduct for
Investment Advisers.
\572\ See letter from ISS.
\573\ See supra notes 41 through 53 and accompanying text.
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One commenter also stated that the final rule's economic effects
should be measured relative to a baseline that consists of regulation
in effect prior to the Commission Interpretation on Proxy Voting
Advice,\574\ noting that no cost-benefit analysis was performed in
connection with that interpretation.\575\ Consistent with its past
practice, the Commission continues to believe that the appropriate
baseline for its economic analysis consists of all existing regulatory
requirements that apply to the affected parties, including the
Commission Interpretation on Proxy Voting Advice, as well as industry
practice in response to those requirements. Moreover, the Commission
Interpretation on Proxy Voting Advice did not create any new legal
obligations under the securities laws but rather articulated the
Commission's longstanding views on what constitutes ``solicitation.''
Indeed, as noted above, there is evidence that the proxy voting advice
business industry has understood for over 30 years that its proxy
voting advice constitutes a ``solicitation'' under Rule 14a-1(l) or at
least that the Commission may consider such advice to constitute a
``solicitation.'' \576\
---------------------------------------------------------------------------
\574\ See supra note 74.
\575\ See letter from ISS. Another commenter argued that under
that baseline, proxy voting advice businesses were governed by the
fiduciary standard of the Advisers Act, which already required proxy
voting advice businesses to disclose conflicts of interest. See
letter from Glass Lewis II. As noted above, the Commission
acknowledges that some, but not all, proxy voting advice businesses
may be subject to other regulatory regimes, including the Advisers
Act.
\576\ See supra Section II.A.3.
---------------------------------------------------------------------------
Even if a proxy voting advice business had believed it was not
engaged in a ``solicitation'' prior to the interpretation, and thus
newly realized it was engaged in a ``solicitation'' upon issuance of
the interpretation, the impact of this change would have been minimal
given the existing exemptions from the filing and information
requirements of the proxy rules available to proxy voting advice
businesses. The only thing that potentially would have changed for
proxy voting advice businesses would have been heightened awareness of
the application of Rule 14a-9 liability, including the examples of
specific circumstances that could result in a violation of that rule.
To the extent that some proxy voting advice businesses did not
previously understand their voting advice to constitute solicitations
and thus be subject to Rule 14a-9 liability, it is possible that this
heightened awareness could cause those businesses to take more care in
preparing their recommendations. It is also possible that this
heightened awareness could expose proxy voting advice businesses to
greater risk of litigation under Rule 14a-9. However, the Commission is
not aware of evidence--including any specific information provided by
commenters--that the interpretation has resulted or would result in
substantial changes in proxy voting advice businesses' practices. In
any event, even if we were to consider Rule 14a-9 as though it were to
apply to proxy voting advice businesses for the first time, we believe
the benefits to investors of this antifraud rule insofar as it would
deter proxy voting advice businesses from making materially false or
misleading statements or omissions supports its application to proxy
voting advice notwithstanding the costs associated with any increased
risk of litigation. For all of these reasons, we do not expect that
using a baseline prior to the Commission Interpretation on Proxy Voting
Advice would have significantly altered our assessment of the economic
effects of the proposed amendments.
Finally, we note that--beyond the codification of our
interpretation of solicitation--the conflicts disclosure requirements
and principles-based engagement requirements in the final amendments
will be new for all proxy voting advice businesses. The economic
effects of these amendments are thus analyzed as new requirements for
each of these businesses, regardless of whether they understood their
proxy voting advice to constitute a ``solicitation'' prior to the
interpretation. Accordingly, we believe that our economic analysis
appropriately captures the anticipated economic effects of the final
amendments.
C. Benefits and Costs
We discuss the economic effects of the final amendments below. For
both the benefits and the costs, we consider each piece of the final
amendments in turn. The final amendments include: (1) Amendments to the
definition of solicitation in Rule 14a-1(l); (2) conditioning
availability of the exemptions in Rules 14a-2(b)(1) and (b)(3) on (a)
proxy voting advice businesses providing disclosure regarding conflicts
of interest and (b) proxy voting advice businesses adopting and
publicly disclosing written policies and procedures reasonably designed
to ensure that the proxy voting advice is made available to registrants
at or prior to the time when such advice is disseminated to the proxy
voting advice business's clients and that the proxy voting advice
business provides clients with a mechanism by which they can reasonably
be expected to become aware of a registrant's written statement about
the proxy voting advice in a timely manner; and (3) an amendment to the
examples in Rule 14a-9 of disclosure that, if omitted from a proxy
solicitation and depending upon the particular facts and circumstances,
may be misleading.
1. Overview of Benefits and Costs and Comments Received
a. Benefits
As discussed in further detail below, we expect the rule to
generate benefits compared to the baseline for clients of proxy voting
advice businesses and investors, and, albeit to a lesser extent, for
proxy voting advice businesses and registrants. We expect that the
largest benefits will come from conditioning availability of the
exemptions in Rules 14a-2(b)(1) and (b)(3) on proxy voting advice
businesses providing certain disclosures and maintaining certain
policies and procedures. In contrast, amendments to the definition of
solicitation in Rule 14a-1(l) and to Rule 14a-9 represent less
significant changes from the existing baseline and will likely result
in more modest benefits for proxy voting advice businesses and their
clients.
Two commenters expressed support for the general benefits that the
[[Page 55133]]
proposed rules would generate.\577\ Both commenters argued that the
shareholder proxy voting process is beset with collective-action
problems, whereby both institutional and retail investors are not
motivated to incur large expenses to collect information to become
better informed about a company, particularly when the company is just
one of a portfolio. According to the commenters, this results in
resource-constrained proxy voting advice businesses that produce voting
recommendations that are not adequately informed or precise. Such
voting recommendations could lead to suboptimal voting decisions by
clients of the proxy voting advice businesses. As we mention above, the
purpose of the final amendments is to improve the information available
to shareholders when making voting decisions, which could ultimately
result in more efficient investment outcomes.
---------------------------------------------------------------------------
\577\ See letters from James R. Copland, Senior Fellow and
Director, Legal Policy, Manhattan Institute for Policy Research
(Feb. 3, 2020) (``Manhattan Institute''); B. Sharfman I.
---------------------------------------------------------------------------
In contrast, several commenters generally disputed the benefits to
proxy voting advice businesses' clients and investors resulting from
the proposed amendments.\578\ One commenter argued that the general
benefits of the rule are speculative at best,\579\ while two other
commenters characterized them as ``illusory.'' \580\ One of these
commenters asserted that none of the amendments would create any
benefits for proxy voting advice businesses and their clients and that
the only beneficiaries would be self-interested corporate
insiders.\581\ Another commenter argued that the proposed rules would
not improve the quality of proxy advice, asserting that the benefits
are small and uncertain.\582\
---------------------------------------------------------------------------
\578\ See letters from Bricklayers; ISS; New York Comptroller
II; ProxyVote II.
\579\ See letter from ProxyVote II.
\580\ See letters from CFA Institute I; ISS.
\581\ See letter from ISS.
\582\ See letter from Bricklayers.
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We do not agree with these assessments. While the extent of the
benefits will depend on the existing practices of proxy voting advice
businesses and how they choose to implement the required disclosures
and procedures (as well as the existing practices of their clients and
how they, in turn, adjust), we believe that the improved transparency
that the final rules will generate will be beneficial for proxy voting
advice businesses' clients and will likely improve the overall proxy
voting process. Indeed, the fact that in certain circumstances, and to
varying extents, proxy voting advice businesses already incorporate
practices similar to the final amendments belies the notion that these
expected benefits are speculative or illusory. For example, if proxy
voting advice businesses saw no benefit to providing conflicts of
interest disclosure to their clients, they would not provide such
disclosure currently, absent a regulatory requirement. We also note
that the final amendments reflect significant changes from the proposal
in light of commenter input and concerns, and we believe these changes
focus on improvements to the proxy process most likely to yield
benefits and result in final amendments that are less costly, when
measured against the baseline, as compared to the costs of the
proposal.
b. Costs
We expect that proxy voting advice businesses as well as
registrants will incur direct costs as a result of the final
amendments. In the following sections, we analyze the costs of the
final amendments due to changes in proxy voting advice business
disclosure and engagement practices relative to the baseline. Further,
to the extent that any of the final amendments impose direct costs on
proxy voting advice businesses that are passed along to clients, the
final amendments could impose indirect costs on clients of proxy voting
advice businesses, including investment advisers and institutional
investors, and the underlying investors they serve, if applicable.
Some commenters expressed concern that the economic analysis in the
Proposing Release was not thorough enough or that it understated the
costs and other negative effects that the proposed rules would have on
proxy voting advice businesses and investors.\583\ Some of these
commenters also commented on the costs of specific proposed amendments,
which we discuss below. One commenter stated that, with respect to the
quantitative cost estimates in the Commission's Paperwork Reduction Act
(``PRA'') analysis, it believed the actual compliance costs would be
240 times those estimated in the Proposing Release.\584\ One commenter
urged a more thorough cost-benefit analysis or other investigation to
gather data from which reasonable cost estimates can be
extrapolated.\585\
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\583\ See letters from Bricklayers; CalPERS; CFA Institute I;
Kathryn McCloskey, Director, Social Responsibility, United Church
Funds (Feb. 3, 2020) (``Church Funds''); CII IV; Glass Lewis II;
Karen L. Barr, President and CEO, Investment Adviser Association,
(Feb. 3, 2020) (``IAA''); ICI; ISS; New York Comptroller II; Ohio
Public Retirement; Lucian Arye Bebchuk, James Barr Ames Professor of
Law, Economics, and Finance, Harvard Law School (Feb. 3, 2020)
(``Prof. Bebchuk''); ProxyVote II; IASJ; Segal Marco II. See also
IAC Recommendation.
\584\ See letter from Nichol Garzon-Mitchell, Senior Vice
President, General Counsel, Glass Lewis (Jan. 7, 2020) (``Glass
Lewis I'').
\585\ See letter from Ohio Public Retirement.
---------------------------------------------------------------------------
We acknowledge, as we did in the Proposing Release, that the final
amendments will likely generate direct and indirect costs for proxy
voting advice businesses and potentially their clients. To the extent
that a large driver of the costs discussed by commenters would have
been the proposed amendment regarding registrant review and response to
proxy voting advice, the flexibility afforded by the principles-based
approach reflected in the final rules, particularly as it accommodates
practices similar to current practices, should result in lower costs
for proxy voting advice businesses and their clients as compared to the
more prescriptive approach we proposed.
In the following sections, we discuss the specific costs and
benefits for each aspect of the final amendments.
2. Codification of the Commission's Interpretation of ``Solicitation''
Under Rule 14a-1(l) and Section 14(a)
We are codifying 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 amendment to have a significant economic impact because it
codifies an already-existing Commission interpretation. This
interpretation itself did not modify existing law or reflect a change
in the Commission's position and is distinct from the amendments
conditioning availability of the exemptions in Rules 14a-2(b)(1) and
(b)(3) on proxy voting advice businesses providing certain disclosures
and maintaining certain policies and procedures, which we acknowledge
would alter the costs and benefits associated with being subject to the
federal proxy rule regime and which we discuss in detail below.\586\
Nonetheless, the final amendment to Rule 14a-1 codifying this
interpretation in the Commission's proxy rules may provide more clear
notice that Section 14(a) and the proxy rules apply to proxy voting
advice. Parties receiving proxy voting advice may benefit from such
notice to the extent that it informs them that the
[[Page 55134]]
communication they receive from proxy voting advice businesses is
subject to the protections (e.g., antifraud protections) that come from
the fact that such communication is a solicitation. As discussed above,
even if a proxy voting advice business had believed it was not engaged
in a ``solicitation'' prior to the interpretation, we believe the
impact of this change would be minimal given the existing exemptions
from the filing and information requirements of the proxy rules
available to proxy voting advice businesses. The Commission is unaware
of specific evidence that the interpretation has resulted or would
result in a substantial increase in costs due to the application of
Rule 14a-9 to proxy voting advice.\587\
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\586\ Several commenters suggested that the Commission should
use a baseline that does not include the August 19 interpretation.
See, e.g., letters from Glass Lewis II; ISS. We respond to these
comments in supra Section IV.B.2.
\587\ See discussion in supra Section IV.B.2.
---------------------------------------------------------------------------
We also are amending Rule 14a-1(l)(2) to clarify that the
furnishing of proxy voting advice by certain persons will 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 or
a person who does not market its expertise as a provider of proxy
voting advice, separately from other forms of investment advice, will
not be deemed a solicitation. Again, we do not expect this adopted
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.
3. Amendments to Rule 14a-2(b)
a. Conflicts of Interest--New Rule 14a-2(b)(9)(i)
i. Benefits
We are amending 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.\588\ These conflicts of interest
disclosures are intended to augment existing requirements by eliciting
information that may not be captured by the current requirements of
either Rule 14a-2(b)(1) and (b)(3) and that is more tailored to proxy
voting advice businesses and the nature of their conflicts. The final
amendments require disclosure of conflicts that is sufficiently
detailed such 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
availing themselves of an exemption will 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 final
amendments also will specify that the enhanced conflicts disclosures
must be provided in the proxy voting advice and in any electronic
medium used to deliver the advice.
---------------------------------------------------------------------------
\588\ See supra Section II.B.3.
---------------------------------------------------------------------------
We believe the final amendments will 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. Under Rule 14a-2(b)(9)(i), disclosure
of conflicts will be more comprehensive regardless of which exemption
the proxy voting advice business relies upon for its proxy voting
advice.\589\ Furthermore, we believe the requirement that conflicts of
interest disclosures be included in the voting advice will benefit
clients of proxy voting advice businesses by making more standard the
time and manner in which such principles-based 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. We believe this will, in turn, make
it easier or more efficient for such clients to review and analyze the
conflicts disclosure, thus reducing the agency costs associated with
utilizing the services of proxy voting advice businesses.
---------------------------------------------------------------------------
\589\ As noted above, Rule 14a-2(b)(3) requires disclosure of
significant relationships with the registrant or relevant
shareholder proponent, whereas Rule 14a-2(b)(1) does not currently
require conflict of interest disclosures.
---------------------------------------------------------------------------
Disclosure of material conflicts of interest can lead to more
informed decision-making, and we anticipate that institutional
investors and investment advisers will use information from disclosures
of material conflicts of interest to make more informed voting
decisions.\590\ Thus, to the extent they enable the clients of proxy
voting advice businesses to make more informed voting decisions on
investors' behalf, these disclosure requirements will also benefit
investors. Further, we believe these disclosures will make it easier
and more efficient for clients that are investment advisers to conduct
a reasonable review of a proxy voting advice business's policies and
procedures regarding how the proxy voting advice business identifies
and addresses conflicts of interest.\591\
---------------------------------------------------------------------------
\590\ See letter from CEC.
\591\ See supra Section II.B.3.
---------------------------------------------------------------------------
One commenter that is a proxy voting advice business and a
registered investment adviser suggested that the benefits associated
with Rule 14a-2(b)(9)(i) will be marginal because of proxy voting
advice businesses' existing fiduciary duty to their clients and the
disclosures they already provide.\592\ Relatedly, several institutional
clients of proxy voting advice businesses stated that they believe
existing practices provide sufficient disclosure of conflicts of
interest under the baseline.\593\ As an initial matter, not all proxy
voting advice businesses have registered as investment advisers and
hence may not have the same fiduciary duty as the commenter. Moreover,
even where certain proxy voting advice businesses provide detailed
disclosure about conflicts of interest under existing practices or
regulatory regimes, requiring tailored disclosure as a condition to the
proxy rule exemptions will help to ensure that the disclosure is more
consistently provided to consumers of proxy voting advice across the
industry. As noted in Section IV.B.1 above, existing conflict of
interest disclosure by proxy voting advice businesses differs across
firms, including in structure, coverage, and manner of conveyance.
---------------------------------------------------------------------------
\592\ See letter from ISS.
\593\ See supra notes 195-197.
---------------------------------------------------------------------------
Importantly, the final rule will provide users of proxy voting
advice with timely access to such disclosure in the proxy voting advice
and in any electronic medium used to deliver the advice. As a result,
we believe the final rule will allow clients of proxy voting advice
businesses to more efficiently access the conflicts disclosure and
assess a proxy voting advice business's potential conflicts of
interest. However, we acknowledge that, to the extent that proxy voting
advice businesses currently provide information that meets or exceeds
the adopted disclosure requirements, and to the extent that clients of
proxy voting advice businesses find current disclosure practices under
the baseline to be sufficient, the benefits described above will be
more limited.\594\
---------------------------------------------------------------------------
\594\ For example, ISS and Glass Lewis are signatories to a set
of voluntary industry-developed practices which state that, as a
matter of principle, signatories should have processes in place to
identify and disclose conflicts of interest to their clients. See
BPP Group Best Practice Principles for Shareholder Voting Research,
available at https://bppgrp.info (last visited May 21, 2020).
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[[Page 55135]]
iii. Costs
The new conflicts of interest disclosure requirements will impose a
direct cost on proxy voting advice businesses to the extent proxy
voting advice businesses are not already providing information that
meets the adopted materiality-based disclosure requirements.\595\
Specifically, proxy voting advice businesses will bear 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 advice businesses that are
investment advisers are already required to identify conflicts and to
eliminate or make full and fair disclosure of those conflicts.\596\
Further, proxy voting advice businesses that are retained by investment
advisers to assist them with proxy voting may already provide such
conflicts disclosure in connection with the investment advisers'
evaluation of the capacity and competency of the proxy voting advice
business. Additionally, as discussed above, proxy voting advice
businesses who currently rely on the Rule 14a-2(b)(3) exemption already
must disclose any significant relationship or material interest bearing
on the voting advice.
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\595\ Id.
\596\ See Standard of Conduct for Investment Advisers.
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We are unable to provide quantitative estimates of these direct
costs on proxy voting advice businesses because the facts and
circumstances unique to each proxy voting advice business, including
the disclosures it currently provides to its clients as well as the
nature of its material interests, transactions, and relationships, will
dictate the additional disclosure, if any, it must provide under the
final rule. As discussed in Section II.B.1 above, boilerplate language
will not be sufficient to satisfy new Rule 14a-2(b)(9)(i). Under the
rule, a proxy voting advice business will be required to provide
conflicts disclosure with enough specificity to enable its 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 it provides its clients and the subject
registrant) and may need to be updated periodically as both the
business's and its clients' interests change. Additionally, proxy
voting advice businesses' direct costs will depend on the extent to
which their current practices and procedures already meet or exceed the
new disclosure requirements.\597\
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\597\ See supra Section II.B.3.
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A number of commenters asserted that the amendments regarding
enhanced conflict of interest disclosure would impose compliance
costs.\598\ One commenter stated that the proposed additional
disclosures of conflicts of interest would generate additional
paperwork burdens but no additional benefits.\599\ Another commenter
that addressed the PRA burdens of the new conflicts of interest
disclosure estimated that identifying and disclosing conflicts in the
manner specified in the proposal would result in an additional one hour
to identify conflicts at 5,565 registrants and 0.5 hours to disclose
conflicts at 807 issuers, for a total of 5,969 additional hours per
year.\600\ As noted in Section V.C.1.a below, in response to that
commenter's feedback, we have increased our PRA burden estimates of the
enhanced conflict of interest disclosure. For PRA purposes, we estimate
that the cost of the enhanced conflict of interest disclosure will be
6,000 burden hours per proxy voting advice business.
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\598\ See, e.g., letters from ISS; IAA; Ohio Public Retirement.
\599\ See letter from CalPERS.
\600\ See letter from Glass Lewis I.
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One commenter stated that the proposed amendments would compromise
the firewall between its proxy voting advice business and corporate
services business,\601\ presumably by revealing the clients of the
corporate services arm to the research arm. We note, however, that the
rule we are adopting gives a proxy voting advice business the option to
include the required disclosure either in its proxy voting advice or in
an electronic medium used to deliver the proxy voting advice, such as a
client voting platform, which allows the business to segregate the
information, as necessary, to limit access exclusively to the parties
for which it is intended.
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\601\ See letter from ISS.
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Another commenter argued that the enhanced conflict of interest
disclosure could artificially and significantly inflate the number of
conflicts reported.\602\ Because proxy voting advice businesses have
not been providing the level of enhanced disclosure required by the
final rule, compliance with the final rules would, according to the
commenter, make it appear as if proxy voting advice businesses have to
date been underreporting material conflicts of interest. According to
the commenter, this would result in reputational harm for proxy voting
advice businesses. While we agree that an increase in the number of
material conflicts reported could affect the reputation of proxy voting
advice businesses, we believe it is appropriate for proxy voting advice
businesses that have conflicts with the potential to influence the
recommendations they provide clients to bear the reputational effects
and other costs associated with disclosure of those conflicts.
---------------------------------------------------------------------------
\602\ See letter from Ohio Public Retirement.
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As discussed in Section II.B.3 above, the final amendments have
been revised to streamline the requirements and provide proxy voting
advice businesses the flexibility to determine which situations merit
disclosure and the specific details to provide to their clients about
any conflicts of interest identified. This less prescriptive approach
should help alleviate concerns that the new requirement will compel
disclosure of information that may compromise existing safeguards,
result in unduly lengthy disclosures, or harm proxy advice voting
businesses' reputations. In addition, the revised approach may make it
easier for businesses to leverage their existing disclosures to satisfy
the final rule and mitigate concerns that the rule will result in
unnecessary paperwork burdens, while still providing more consistent
information about conflicts of interest.
b. Notice of Proxy Voting Advice and Registrant Response--New Rule 14a-
2(b)(9)(ii)
i. Benefits
In contrast to the Proposing Release, the final amendments to Rule
14a-2(b)(9) set forth a principles-based approach designed to ensure
that proxy voting advice businesses' clients have access to more
transparent and complete information and benefit from a robust
discussion of views when making voting decisions.\603\ The final
amendments also provide non-exclusive safe harbors that the proxy
voting advice businesses may use to satisfy the principles-based
requirements in Rule 14a-2(b)(9)(ii).
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\603\ See supra Section II.C.3.
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We believe the final amendments will 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 proxy voting advice and make
determinations about how to cast votes. Providing timely notice to
registrants of voting advice will allow registrants to more effectively
determine
[[Page 55136]]
whether they wish to respond to the recommendation by publishing
additional soliciting materials and to do so in a timely manner prior
to shareholders casting their votes. Registrants may wish to do so for
a variety of reasons, including, for example, because they have
identified what they perceive to be factual errors or methodological
weaknesses in the proxy voting advice businesses' analysis or because
they have a different or additional perspective with respect to the
recommendation. In either case, clients of proxy voting advice
businesses may benefit from the availability of additional information
upon which to base their voting decision. Registrants may also wish to
respond because they agree with some or all aspects of the analysis. In
that case, that fact also would likely be relevant to and enhance a
client's decision-making. Further, to the extent that proxy voting
advice businesses choose to adopt policies and procedures that permit
them to refine their advice based on any feedback they might receive
from registrants, users of the advice and the investors they serve (if
applicable) could benefit from more reliable and complete voting
advice.
Ensuring that a proxy voting advice business provides clients with
a mechanism by which they can reasonably be expected to become aware of
any written response by a registrant to the proxy voting advice (i.e.,
additional soliciting materials) will benefit users of the advice--
including any underlying investors--by ensuring that they have ready
and timely access to the registrant's perspective on such advice when
considering how to vote. Clients of proxy voting advice businesses
often must make voting decisions in a compressed time period. Timely
access to registrant responses to the advice would facilitate clients'
evaluation of the voting advice by highlighting disagreement on facts
and data, differences of opinion, or additional perspectives before the
client casts its votes.
One commenter questioned the benefits to clients of proxy voting
advice businesses from the registrants' ability to review the proxy
voting advice.\604\ According to that commenter, accurate and complete
advice is already being provided by proxy voting advice businesses to
their clients. As we discuss in Section II.B.2 above, and as noted by
several commenters,\605\ some proxy voting advice businesses currently
have internal policies and procedures aimed at enabling feedback from
certain registrants before they issue voting advice. This suggests that
proxy voting advice businesses themselves recognize the potential
benefit of such feedback, which could serve as a bonding mechanism for
these businesses by demonstrating to clients that the proxy voting
advice business believes the advice it provides is based on accurate
information. Even where proxy voting advice businesses currently
provide opportunities for review and feedback, however, these existing
practices may be inadequate to appropriately mitigate the agency costs
associated with use of proxy voting advice. Specifically, it does not
appear that all proxy voting advice businesses currently provide all
registrants with an opportunity to review proxy voting advice.\606\
Under Rule 14a-2(b)(9)(ii), proxy voting advice businesses' policies
and procedures must be reasonably designed to ensure that proxy voting
advice is made available to registrants that are the subject of such
advice in a timely manner prior to or at the same time when such advice
is disseminated to the proxy voting advice businesses' clients and thus
will provide additional registrants with the ability to respond to that
advice (if they so choose) in a timely manner, thereby enhancing the
total mix of information available to proxy voting advice business
clients.
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\604\ See letter from ISS.
\605\ See, e.g., letters from Glass Lewis II; ISS.
\606\ See supra Section IV.A.
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Rule 14a-2(b)(9)(iii) could also yield benefits to the extent that
proxy voting advice businesses' policies and procedures encourage
registrants to file their definitive proxy statements earlier than they
otherwise would. Earlier filing of definitive proxy statements could
benefit investors generally, as they will have more time to review the
materials. As discussed below, earlier filing of these materials also
could help mitigate potential costs for proxy voting advice businesses
stemming from Rule 14a-2(b)(9)(iii). Under the safe harbor provided by
the final amendments, proxy voting advice businesses may condition
dissemination of proxy voting advice to a registrant on the registrant
filing its definitive proxy statement at least 40 calendar days before
the annual meeting. One commenter submitted data analysis showing that,
for 2018, more than 87.8 percent of registrants filed proxy materials
at least 40 calendar days before an annual meeting.\607\ Based on these
estimates, proxy voting advice businesses that choose to avail
themselves of the safe harbor by implementing its terms without
modification might affect the timing of up to 12.2 percent of
filings.\608\ We note, however, that proxy voting advice businesses may
structure their policies to accommodate registrants that may file less
than 40 calendar days before the shareholder meeting and remain within
the safe harbor.
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\607\ See letter from CII VIII. Calculated as (2,900 + 460)/
3,828 = 0.878. The commenter stated that of 3,828 companies, 2,900
filed proxy materials between 40 and 48 calendar days in advance of
annual meetings and 460 filed proxy materials 50 or more days in
advance of annual meetings.
\608\ Under the safe harbor, a registrant may opt to forgo the
benefits of receiving notice of proxy voting advice at the same time
as clients if it deems accelerating the filing of its proxy
materials to meet the 40-day threshold sufficiently costly.
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ii. Costs
With respect to the requirement that proxy voting advice businesses
adopt and publicly disclose policies and procedures reasonably designed
to ensure that (i) registrants receive in a timely manner the proxy
voting advice report, and (ii) proxy voting advice businesses provide
clients with a mechanism by which they can reasonably be expected to
become aware of a registrant's additional soliciting material in
response to the advice in a timely manner, proxy voting advice
businesses will bear direct costs. There will also be indirect costs to
other parties.
(a) Direct Costs
For the principle set forth in Rule 14a-2(b)(9)(ii)(A), proxy
voting advice businesses will bear direct costs associated with
modifying current systems and methods, or developing and maintaining
new systems and methods, to ensure the conditions of the exemption are
met and with delivering the report to registrants. While some proxy
voting advice businesses may already have systems in place to address
some or all of these requirements,\609\ we do not have data that would
allow us to estimate the costs associated with modifying or developing
these systems and methods to encompass all registrants. To the extent
proxy voting advice businesses already have similar systems in place,
any additional direct cost may be limited. In addition, as we
[[Page 55137]]
discuss in more detail below, depending on how proxy voting advice
businesses choose to meet the principle, they may incur direct costs
associated with executing, obtaining, or modifying acknowledgments or
agreements with respect to the use of any information shared with the
registrant in the process of delivering the report to the registrant.
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\609\ See, e.g., letter in response to the SEC Staff Roundtable
on the Proxy Process from Glass Lewis (Nov. 14, 2018) (``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.'').
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A proxy voting advice business may also incur direct costs in
satisfying the requirement of Rule 14a-2(b)(9)(ii)(B) that it adopt and
publicly disclose written policies and procedures reasonably designed
to ensure that the proxy voting advice business provides clients with a
mechanism by which they can reasonably be expected to become aware of a
registrant's written statements about the proxy voting advice in a
timely manner before the shareholder meeting. For example, to be
eligible for the safe harbor in the new Rule 14a-2(b)(9)(iv), a proxy
voting advice business could provide: (i) Notice on its electronic
client platform that the registrant has filed, or has informed the
proxy voting advice business that it intends to file, additional
soliciting materials (and include an active hyperlink to those
materials on EDGAR when available); or (ii) notice through email or
other electronic means that the registrant has filed, or has informed
the proxy voting advice business that it intends to file, additional
soliciting materials (and include an active hyperlink to those
materials on EDGAR when available). Both mechanisms for informing
clients could involve initial set-up costs as well as ongoing costs.
Since they are not required to rely on the safe harbor, proxy
voting advice businesses may also put in place other mechanisms by
which their clients may reasonably be expected to become aware of a
registrant's written statements about the proxy voting advice in a
timely manner, which could be more or less costly than relying on the
safe harbor. Under the final amendments, those mechanisms also must
ensure that clients obtain the notification in a timely manner. Because
the final amendments permit proxy voting advice businesses substantial
flexibility in satisfying this condition, we expect proxy voting advice
businesses to implement mechanisms differently depending on, among
other things, their own facts and circumstances and the nature of their
client bases. Thus, the overall costs of satisfying this condition are
difficult to quantify. We believe, however, that the costs of
implementing a mechanism by which clients may reasonably be expected to
become aware of registrants' views could involve (i) developing systems
to gather information about the filing of additional soliciting
materials by registrants; and (ii) modifying existing systems so that
clients may reasonably be expected to become aware that registrants
have filed such additional soliciting materials. To the extent proxy
voting advice businesses already have similar systems in place, any
additional direct cost may be limited.
Many commenters asserted that allowing registrants to review the
proxy voting advice that proxy voting advice businesses have prepared
for clients, as would have been required under the proposed rules,
would generate significant costs for proxy voting advice businesses and
their clients.\610\ Some commenters stated that the sheer volume of
reports that proxy voting advice businesses would have to send to
registrants would generate large compliance costs. For example, one
commenter noted that the number of reports it alone would need to send
to registrants for review would increase from 450 in 2019 to
approximately 6,500 to 25,000 post-adoption, and that it would incur
costs of drafting at least 6,000 confidentiality agreements.\611\
Another commenter asserted that the compliance costs stemming from this
amendment would be disproportionately higher for smaller proxy voting
advice businesses.\612\ Some commenters indicated that, under the
proposed rules, proxy voting advice businesses would have to negotiate
and enter into confidentiality agreements with each applicable
registrant to avoid the dissemination of sensitive information, and the
commenters provided estimates of those burdens.\613\
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\610\ See, e.g., letters from CalPERS; CFA Institute I; CII IV;
IAA; ICI; ISS; New York Comptroller II; Olshan LLP; Ohio Public
Retirement; Prof. Bebchuk; ProxyVote II.
\611\ See letter from ISS.
\612\ See letter from CII IV.
\613\ See letters from CalPERS (indicating that proxy voting
advice businesses would need to enter into hundreds or possibly
thousands of different agreements which would be costly); ISS
(stating that it would incur costs of drafting at least 6,000
confidentiality agreements); Glass Lewis I (estimating that it will
incur a compliance burden of four hours per registrant to negotiate
or secure confidentiality agreements with 4,912 issuers for a total
of 19,648 hours); Olshan LLP (suggesting that negotiating such
agreements would result in the allocation of significant time and
cost by proxy voting advice businesses). Also, one commenter argued
that confidentiality agreements would be ineffective at preventing
leaks of proxy voting advice due to the large number of registrant
employees that would have access to the information. See letter from
Olshan LLP.
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We recognize the concerns raised by these commenters regarding
compliance costs associated with the proposed registrant review and
response process. In response, as suggested by several commenters, we
are adopting a more principles-based approach intended to achieve many
of the same objectives of the proposal without unduly encumbering the
ability of proxy voting advice businesses to provide their clients with
timely and reliable voting advice. The final amendments will require
proxy voting advice businesses to have policies and procedures
reasonably designed to ensure that proxy voting advice is made
available to registrants at or prior to or at the same time it is
disseminated to the proxy voting advice businesses' clients rather than
within a specified period of time. Additionally, the final amendments
impose only a one-time obligation with respect to notifying registrants
of a given proxy voting advice. We are also adopting new Rule 14a-
2(b)(9)(v), which will exclude from the scope of Rule 14a-2(b)(9)(ii)
proxy voting advice to the extent that such advice is based on custom
policies, and new Rule 14a-2(b)(9)(vi), which will exclude from the
scope of Rule 14a-2(b)(9)(ii) proxy voting advice as to non-exempt
solicitations regarding certain mergers and acquisitions or contested
matters.
We believe the significant additional flexibility in the final
amendments will enable proxy voting advice businesses to design
policies and procedures that satisfy the new conditions of the
exemptions but are nonetheless efficiently tailored to their specific
business models and practices. This more flexible approach also may
permit proxy voting advice businesses to leverage their existing
systems and methods to satisfy the conditions. We thus believe, when
measured against the baseline, the final amendments will impose lower
compliance costs and result in fewer disruptions for proxy voting
advice businesses and their clients, than the more prescriptive
approach set forth in the proposal.
While a more principles-based approach to regulation provides
additional flexibility for affected parties, it also may impose certain
costs if the parties are unsure of what measures are needed to satisfy
the legal requirement. For example, such an approach can entail
additional judgment on the part of management or result in parties
doing more than what is required in order to ensure they satisfy the
applicable standard. The non-exclusive safe harbors built into the
final amendments will provide legal certainty to proxy voting advice
businesses that they can rely on the solicitation exemptions in Rules
14a-2(b)(1) and (b)(3) and therefore could further mitigate the
compliance burdens associated with the
[[Page 55138]]
new conditions. They also may provide some guidance to proxy voting
advice businesses about how they can design their own policies and
procedures to satisfy the conditions.
As noted in Section V.C.1.a below, we believe that much of the
burden of the final amendments would be for the proxy voting advice
business to develop policies that satisfy the principles and
accordingly modify or develop systems and practices to implement such
policies. The principles-based approach we implement should help reduce
such compliance costs significantly, which would likely result in a
lower PRA burden than the commenter estimates based on the proposal.
Also, our revised PRA estimates take into consideration our
understanding that some proxy voting advice businesses have systems and
practices in place that may complement or overlap with the new
requirements, which could substantially reduce compliance costs. For
PRA purposes, we estimate that each proxy voting advice business would
incur 2,845 burden hours for the notice to registrants under Rule 14a-
2(b)(9)(ii)(A) and 2,845 burden hours for the notice to clients under
Rule 14a-2(b)(9)(ii)(B).\614\
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\614\ See discussion in infra Section V.B.1 for the assumptions
we make when estimating hours and costs associated with maintaining,
disclosing, or providing the information required by the amendments
that constitute paperwork burdens imposed by a collection of
information.
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In addition to these system-related costs, we expect that proxy
voting advice businesses would, as a general matter, obtain
acknowledgments or agreements with respect to the use of any
information shared with a registrant, as we expect that the business
would seek to limit disclosure of its report. Several of the changes to
the final rule amendments should allow proxy voting advice businesses
to take measures to reduce these compliance costs compared with the
cost of the confidentiality agreements contemplated under the proposal.
For example, under the principles-based approach that we are adopting,
in instances where a proxy voting advice business judges the potential
impact of the disclosure of information contained in the report to be
high it could provide the advice to registrants at the time it is
provided to their clients or it may choose to provide draft reports to
registrants before making them available to clients while imposing more
stringent confidentiality requirements or terms of use on registrants
to prevent release of commercially sensitive information. This should
reduce the risk that commercially sensitive information about proxy
voting advice may be disseminated more broadly.
Moreover, as adopted, the principles-based approach does not
dictate the manner in which proxy voting advice businesses provide the
report to registrants, and instead gives the proxy voting advice
business discretion to choose how best to implement the principle of
the rule and incorporate it into the business's policies and
procedures, including by leveraging existing practices. In this regard,
we note that some proxy voting advice businesses currently provide
reports to registrants without requiring formal confidentiality
agreements, instead requiring only an electronic acknowledgement of
terms of use.\615\ Such an approach is likely to involve less
negotiation between proxy voting advice business and registrants than
formal confidentiality agreements, and thus lower compliance
costs.\616\ Further, an acknowledgment of terms of use could be
designed to apply prospectively, including for future proxy seasons,
making this a one-time cost when a proxy voting advice business
initiates coverage of a registrant. Overall, for purposes of our PRA,
we estimate that each proxy voting advice business will incur a burden
of between 50 and 5,690 hours per year associated with securing an
acknowledgment or other assurance that the proxy advice will not be
disclosed.\617\ Another potential cost for proxy voting advice
businesses could result from new Rule 14a-2(b)(9)(vi). When additional
matters are presented for shareholder approval at meetings with
applicable M&A transaction or contested matters, then the portion of
the proxy voting advice provided with respect to the applicable M&A
transaction or contested matters will be excluded from the scope of
Rule 14a-2(b)(9)(ii). This means that in those situations, proxy voting
advice businesses may choose to redact the report that they have to
deliver to registrants, which will generate costs for them. It is also
possible, however, that proxy voting advice businesses would choose
instead to deliver an un-redacted report, in which case they will not
incur the costs of redaction.\618\
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\615\ For example, Glass Lewis requires a registrant to click
and agree to certain ``terms of use'' before being able to access
the notice and recommendations.
\616\ We recognize that some proxy voting advice businesses,
irrespective of their current practices or what the final amendments
envision, may nevertheless choose to enter into formal
confidentiality agreements with some registrants. For such proxy
voting advice businesses, the compliance costs may be closer to
those estimated by the commenters.
\617\ See discussion in infra Section V.B.1 for the assumptions
we make when estimating hours and costs associated with maintaining,
disclosing, or providing the information required by the amendments
that constitute paperwork burdens imposed by a collection of
information.
\618\ In choosing not to redact, proxy voting advice businesses
potentially increase their exposure to the risk that their
recommendations will be revealed to market participants. As a
result, we anticipate that proxy voting advice businesses will be
less likely to offer pre-publication review to registrants of
reports that contain recommendations related to contested matters or
M&A transactions.
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A number of commenters raised concerns about the costs associated
with the provisions in the proposed rules that would have established a
formal process by which the registrant would be given the opportunity
to review and provide feedback on draft voting advice.\619\ The
principles-based approach in the final rules obviates the need for a
prescribed process for engagement with the registrant and instead
allows proxy voting advice businesses to decide when and how to provide
notice of the proxy voting advice businesses' voting advice to
registrants. Under this approach, proxy voting advice businesses are
not required to, although they may, share pre-publication drafts with
registrants for their feedback. Rather, they must provide the
registrant with a copy of their advice, which could be at the same time
as the advice is shared with clients. Moreover, as with the proposal,
nothing in the final amendments will require proxy voting advice
businesses to alter their advice in response to registrant feedback.
Thus, we believe the final amendments will substantially address, if
not eliminate altogether, the concerns raised by commenters related to
[[Page 55139]]
objectivity and timing pressure associated with the proposed engagement
process.
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\619\ See, e.g., letters from Prof. Bebchuk; ISS; Kerrie Waring,
Chief Executive Officer, International Corporate Governance Network
(Nov. 21, 2019) (``ICGN''); Segal Marco II; TIAA; Daniel P. Hanson,
Chief Investment Officer, Ivy Investment Management Company (Feb. 3,
2020) (``Ivy Investment''); Olshan LLP; First Affirmative. See also
IAC Recommendation. Some commenters expressed a concern that
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 reduce the diversity of
thought in the marketplace for proxy voting advice. See, e.g.,
letters from Prof. Bebchuk; CalPERS; CFA Institute I. See also,
e.g., letter in response to the SEC Staff Roundtable on the Proxy
Process from Glass Lewis (``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 . . . .''). Some commenters noted
conflicts between SRO rules that seek to limit issuers' pre-
publication review of security analyst research reports and the
proposed approach to pre-publication review of proxy voting advice.
See, e.g., letter from CII IV.
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(b) Indirect Costs
The final rule may also impose indirect costs on other parties.
Proxy voting advice businesses may pass through a portion of the costs
of modifying or developing systems to meet the requirements to their
clients through higher fees for proxy advice. Moreover, the policies
and procedures proxy voting advice businesses develop under the final
rule could cause registrants to incur costs. For example, a proxy
voting advice business that chooses to rely on the safe harbor in Rule
14a-2(b)(9)(iii) would adopt policies and procedures that provide a
registrant with a copy of the proxy voting advice business's proxy
voting advice, at no charge, no later than the time it is disseminated
to the business's clients if the registrant has filed its definitive
proxy statement at least 40 calendar days before the meeting date. A
registrant that wishes to review proxy advice prior to the meeting date
may incur costs to accelerate the filing of its definitive proxy
statement to meet the 40-day threshold. However, we expect a registrant
would incur these costs only if it expected the benefits of review to
be sufficiently large.\620\
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\620\ See supra note 608.
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Proxy voting advice business may also bear indirect costs in the
form of lost revenues. While all three major proxy voting advice
business currently offer registrants access to proxy voting reports, in
some circumstances they may charge a fee to registrants for such
access,\621\ or make such access available only in connection with the
purchase of consulting services from an affiliate of the proxy voting
advice businesses. The requirement to share full reports with
registrants under Rule 14a-2(b)(9)(ii) may result in a proxy voting
advice business providing access to proxy voting reports at no charge
to registrants.\622\ This would cause such proxy voting advice business
to lose fees they otherwise would have earned from selling proxy voting
reports to registrants. Without more detailed information about proxy
voting advice businesses' fee schedules and information about the
revenues they currently generate from selling proxy voting reports to
registrants, we are unable to quantify the magnitude of these revenue
losses.
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\621\ See Section IV.B.1.a.ii.
\622\ To rely on the safe harbor in Rule 14a-2(b)(9)(iii), a
proxy voting advice business must provide registrants with a copy of
the proxy voting advice at no charge.
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Several commenters expressed concern that the economic analysis in
the Proposing Release understated or failed to consider the costs of
the proposals on consumers of proxy voting advice.\623\ One commenter
asserted that costs for customers of proxy voting advice will increase
due to both the costs of reduced time to review proxy research reports
and a potential increase in fees, as proxy voting advice businesses
pass their increased costs on to institutional investor clients, who,
in turn, would pass these costs on to their individual investor
participants and beneficiaries.\624\ Another commenter argued that such
costs may lead some institutional investors to forgo the benefits of
using a proxy voting advice business, which could ultimately be
detrimental to the effectiveness of shareholder voting and
oversight.\625\ Similarly, one commenter suggested that the proposed
rules, by increasing the costs of the proxy advice that opposes
management, would impede investors' ability to monitor company
management.\626\ Another commenter, a proxy voting advice business,
stated that the proposed changes could diminish proxy voting advice
businesses' willingness to recommend votes against management and that
this ``would substantially diminish the independent information
available to investors and their ability to hold management accountable
for their actions.'' \627\ Additionally, several commenters supplied
empirical evidence suggesting that the quality of proxy voting advice
depends on the time available for proxy voting advice businesses to
conduct research.\628\ One commenter concluded from this research that
the proposed requirements would reduce the quality of voting
advice.\629\
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\623\ See, e.g., letters from CII IV; ICI; ISS; New York
Comptroller II; PRI II; ProxyVote II; Segal Marco II; Ohio Public
Retirement; Prof. Bebchuk.
\624\ See letter from CII IV.
\625\ See letter from Prof. Bebchuk.
\626\ See letter from PRI II.
\627\ See letter from ISS.
\628\ See letter from Ana Albuquerque, Boston University, et al.
(Feb 3. 2020) (``Prof. Albuquerque et al.'').
\629\ See letter from CII IV.
---------------------------------------------------------------------------
The principles-based approach we are adopting should mitigate many
of these concerns because it will impose compliance costs on proxy
voting advice businesses that are lower than the compliance costs
associated with the approach in the Proposing Release, and hence will
limit the potential increase in the price of proxy advice services for
proxy voting advice businesses' clients. Further, because the
principles-based approach does not include a registrant review and
feedback process that requires pre-publication review, it should reduce
concerns that registrants will lobby proxy voting advice business for
changes to recommendations, and thus should not discourage proxy voting
advice business from making recommendations that oppose management or
impose additional timing constraints on proxy voting advice businesses.
Registrants also could incur costs associated with coordinating
with proxy voting advice businesses to receive the proxy voting advice,
reviewing the proxy voting advice, and determining whether to prepare
and file additional soliciting materials in response to the proxy
voting advice. We expect a registrant would bear these costs only if it
anticipated the benefits of such steps would exceed the costs of such a
program. Similarly, because more registrants who are the subjects of
proxy voting advice will have access to such proxy voting advice in
advance of the shareholder vote, more registrants may file additional
soliciting materials in response to proxy voting advice as a result of
the rule amendments than currently do. Investment advisers, who can
reasonably be expected to become aware of additional soliciting
materials could incur additional costs in connection with the review of
that information. Because these costs will vary depending upon the
particular facts and circumstances of the proxy voting advice, any
issues identified therein, the resources of the registrant or
investment adviser, and in the case of an investment adviser, its
policies and procedures with respect to proxy voting, it is difficult
to provide a quantifiable estimate of these costs.
4. Amendments to Rule 14a-(9)
a. Benefits
Finally, we are amending Rule 14a-9 to add as an example of what
could be misleading, the failure to disclose certain material
information about proxy voting advice, specifically information about
the proxy voting advice business's methodology, sources of information,
and conflicts of interest. We do not expect the amendment to the list
of examples in Rule 14a-9 to significantly alter existing disclosure
practices, as it will largely codify existing Commission guidance on
the applicability of Rule 14a-9 to proxy voting advice.\630\ To the
extent the
[[Page 55140]]
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.
---------------------------------------------------------------------------
\630\ See Commission Interpretation on Proxy Voting Advice at
47419.
---------------------------------------------------------------------------
b. Costs
The final amendments to Rule 14a-9 will impose direct costs on
proxy voting advice businesses to the extent the amended rule 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 the examples being codified were
included in prior Commission guidance.\631\
---------------------------------------------------------------------------
\631\ See supra notes 46 and 67 and accompanying text.
---------------------------------------------------------------------------
Some commenters asserted that the main cost of the Rule 14a-9
amendments will be an increase in litigation risk for proxy voting
advice businesses.\632\ Several commenters stated that this increased
litigation risk would make it more expensive and burdensome for proxy
voting advice businesses to provide their advisory services.\633\ One
commenter asserted that the proposed changes amount to a new cause of
action under Rule 14a-9.\634\ Two other commenters argued that the
proxy voting advice businesses' response to the threat of litigation
under Rule 14a-9 would be to err on the side of caution in complex or
contentious matters, thus increasing the likelihood of the proxy voting
advice business issuing pro-registrant proxy voting
recommendations.\635\ We believe several factors will serve to limit
this risk. As discussed above, Rule 14a-9 liability is grounded in the
concept of materiality and thus would be based on the particular facts
and circumstances and assessed from the perspective of the reasonable
shareholder.\636\ Moreover, neither our proposed amendment to Rule 14a-
9 nor the other amendments we are adopting will broaden the concept of
materiality or create a new cause of action, as some commenters
suggested. Thus, the amendment does not change the scope or application
of existing law. Therefore, we do not expect the new amendment to Rule
14a-9 to generate significant new litigation risk for proxy voting
advice businesses or to result in a shift to more pro-registrant proxy
voting recommendations.
---------------------------------------------------------------------------
\632\ See letters from IAA; ISS; Glass Lewis II; Minerva I.
\633\ See letters from IAA; Glass Lewis II; Minerva I.
\634\ See letter from C. Icahn.
\635\ See letters from ISS; Elliott I.
\636\ See discussion in supra Section II.D.3.
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5. Effect on Smaller Entities
Several commenters specifically stated that the economic analysis
failed to consider the effect and cost of the proposal on smaller proxy
voting advice businesses.\637\ One of these commenters asserted that
small entities (defined by the commenter as those with up to $5 million
in assets) would face significant resource and capacity burdens when
complying with the proposed amendments, without improvements in the
quality of voting for clients.\638\ Another commenter similarly stated
the proposals would be particularly burdensome for small proxy voting
advice businesses.\639\ One commenter stated that the economic analysis
failed to consider the proposal's effect on small and medium-sized
investment advisers and stated these entities would be
disproportionately affected.\640\
---------------------------------------------------------------------------
\637\ See letters from Felician Sisters II; Good Shepherd; IASJ;
Interfaith Center II; St. Dominic of Caldwell.
\638\ See letter from IASJ.
\639\ See letter from Interfaith Center II.
\640\ See letter from IAA.
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As mentioned in Section IV.B.1 above, the Commission is not aware
of smaller firms that currently supply research, analysis, and
recommendations to support the voting decisions of their clients that
would fall within the definition of ``solicitation.'' We therefore
cannot estimate how many small proxy voting advice businesses will be
affected. However, we are cognizant that any smaller proxy voting
advice businesses that operate now or in the future may incur
proportionally higher compliance costs even under the final amendments,
especially if some of the potential costs of the amendments are fixed.
For example, small proxy voting advice businesses may not have
conflicts of interest disclosure policies in place, or may not have
mechanisms to inform clients of registrant feedback. We believe that
the new principles-based approach we are adopting should help address
some of the concerns about the final rule's disparate effect on smaller
firms by providing small proxy voting advice businesses with the
flexibility to design policies and procedures that are scaled to the
scope of their business operations.
Further, we believe that the principles-based approach should
afford existing proxy voting advice businesses flexibility to leverage
their existing practices and mechanisms to efficiently comply with the
new requirements, reducing the compliance burdens that they might pass
through to smaller clients. Finally, we believe that because the final
rules promote the availability of more complete and accurate
information to proxy voting advice clients, they are responsive to
calls for proxy process reform by smaller issuers to ``inspire
confidence in the voting process, drive shareholder engagement, and
bolster long-term value creation.'' \641\ Smaller issuers may also
benefit from the final amendments insofar as they will have greater
opportunity to receive proxy voting advice and inform their
shareholders of their views on such advice, relative to the
opportunities proxy voting advice business currently offer registrants
under voluntary review programs.\642\
---------------------------------------------------------------------------
\641\ See 2019 Small Business Forum.
\642\ See supra Section IV.B.1.a.ii.
---------------------------------------------------------------------------
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
As discussed in Section IV.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 own analysis and execute votes using
internal resources.\643\
---------------------------------------------------------------------------
\643\ Clients of proxy voting advice businesses may also rely on
some combination of internal and external analysis.
---------------------------------------------------------------------------
We believe that, for purposes of general analysis, it is reasonable
to assume that the cost of analyzing matters presented for shareholder
vote will 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 institutions, including mutual
funds, pension funds, and asset managers, large institutions rely less
than small institutions on the research and recommendations offered by
proxy voting advice businesses.\644\ Small
[[Page 55141]]
institutional investors surveyed in the study indicated they had
limited resources to conduct their own research.\645\
---------------------------------------------------------------------------
\644\ See 2007 GAO Report, supra note 474, at 2; see also letter
from BRT (stating since many institutional investors face voting on
a large number of corporate matters every year but lack personnel
and resources, they outsource tasks to proxy advisors); see also
letters in response to the SEC Staff Roundtable on the Proxy Process
from BlackRock (Nov. 16, 2018) (``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 (Jan. 2, 2019) (``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.'').
\645\ See 2007 GAO Report, supra note 474, at 2; see also
letters in response to the SEC Staff Roundtable on the Proxy Process
from Ohio Public Retirement (Dec. 13, 2018) (``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.'');
Transcript of Roundtable on the Proxy Process 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.'').
---------------------------------------------------------------------------
By establishing requirements that promote transparency in proxy
voting advice, the final amendments could lead to an increased demand
for proxy voting advice businesses' voting advice. 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, the
final amendments will impose certain additional costs on proxy voting
advice businesses, and these costs may be passed on to their clients.
To the extent the costs passed on to a client are greater than the
related benefits (or vice versa) to the client it could lead to
decreased (or increased) demand for proxy voting advice business
services by the client. As each client individually decides whether to
use proxy voting advice business services, if aggregate demand for
proxy voting advice business services increases (decreases), there will
be more (or fewer) efficiencies in the proxy voting process.
Some commenters asserted that the ability of registrants to review
the advice and the threat of litigation from registrants would result
in voting advice from proxy voting advice businesses that is less
accurate, useful, and valuable to their clients.\646\ If clients
perceive the amendments as affecting proxy voting advice businesses'
objectivity and independence, this could lead to a decrease in demand
for proxy voting advice and potentially fewer efficiencies in the proxy
voting process.\647\ However, as discussed above, we have made a number
of changes to the proposed amendments that we believe address these
concerns and will lead to more accurate, transparent and complete
information for proxy voting advice business clients.\648\ In addition,
as discussed above, we do not expect the new amendment to Rule 14a-9 to
generate significant new litigation risk for proxy voting advice
businesses.\649\
---------------------------------------------------------------------------
\646\ See, e.g., letters from Prof. Bebchuk; ISS; ICGN; PRI II;
Torsten Jochem, Associate Professor of Finance, University of
Amsterdam, and Anjana Rajamani, Erasmus University Rotterdam (Dec.
16, 2019) (``Profs. Jochem and Rajamani''); Segal Marco II; TIAA;
Ivy Investment; Olshan LLP; First Affirmative; Lisa A. Smith, Vice
President, Advocacy and Public Policy, Catholic Health Association
of the United States (Feb. 3, 2020) (``Catholic Health'');
NorthStar; Rowan Finnegan (Feb. 3, 2020); NASAA; ProxyVote II; Diane
Wade, Head of ESG, CBRE Clarion Securities (Feb. 3, 2020)
(``CBRE''); Michael Rowland (Feb. 3, 2020); Dustyn Lanz, CEO,
Responsible Investment Association (Feb. 3, 2020) (``RIA''); Graeme
Black, Chair, Black Group Australia (Feb. 3, 2020) (``Black
Group''); Ario; CII IV; ACSI; BMO; John Starcher, President and CEO,
Bon Secours Mercy Health (Feb. 3, 2020) ``Bon Secours''); CFA
Institute I; Baillie Gifford; CIRCA; Joanie B. (Feb. 3, 2020);
Canadian Governance Coalition; AllianceBernstein; LA Retirement;
Glass Lewis II; CII V; C. Icahn; CII VI; LACERS; James Elbaor (Feb.
26, 2020); Terrence M. Burgess, Senior Managing Director, Wellington
Management Company (Mar. 3, 2020) (``Wellington''). See also IAC
Recommendation.
\647\ As noted above, we do not have financial data about proxy
advice voting businesses, including financial data by service
provided or by client type, so making these assessments on a
quantitative basis is difficult.
\648\ See discussion in supra Section IV.C.3.b.ii.
\649\ See discussion in supra Section IV.C.4.b.
---------------------------------------------------------------------------
Several commenters also stated that the proposed amendments could
adversely affect the efficiency of how capital is allocated in two ways
stemming from the potential threat of litigation by registrants and
their ability to influence proxy voting advice under the proposed
rule.\650\ First, some of these commenters expressed concern that the
amendments could reduce the independence of proxy voting advice
businesses and the diversity of thought in the market for proxy advice,
which in turn could reduce the information investors and investment
advisers have, resulting in less efficient investment decisions.\651\
Second, some of these commenters stated that the amendments would have
a silencing effect on proxy voting advice businesses, resulting in
value-destroying decisions by managers of registrants who are held less
accountable for their actions.\652\
---------------------------------------------------------------------------
\650\ See, e.g., letters from Shareholder Rights II; ISS.
\651\ See letters from Prof. Bebchuk; CalPERS; CFA Institute I.
\652\ See letters from ISS; PRI II; Better Markets.
---------------------------------------------------------------------------
We believe that the principles-based approach we are adopting helps
address commenter concerns about reductions in the reliability and
independence of proxy voting advice. The final amendments neither
require proxy voting advice businesses to share draft proxy voting
advice with registrants in advance of providing advice to their
clients, nor require proxy voting advice businesses to consider
feedback from registrants on the proxy voting advice. In this way, the
final amendments seek to limit the presence and ameliorate the possible
effects of the independence-related concerns raised by commenters while
preserving many of the intended benefits of the proposed engagement
process, such as enhancing the accuracy, transparency and completeness
of information available to clients of proxy voting advice businesses.
Other commenters disputed that the proposed amendments would bring
about more accurate or transparent proxy voting advice, asserting that
proxy voting advice businesses already provide adequate disclosure
regarding conflicts of interest and a means for engagement with
registrants because the price and quality of service for proxy advice
is determined in a competitive market.\653\ In that case, the
amendments may not result in an increase in demand for proxy advisory
services. As discussed above, while we acknowledge that proxy voting
advice businesses currently disclose conflicts of interest to clients
and permit certain registrants to review proxy voting advice, the final
rules could nevertheless increase demand for proxy voting advice to the
extent that: (i) Clients prefer a more standardized time and means of
receiving conflict disclosures, and (ii) proxy voting advice businesses
expand their existing review procedures as a means of satisfying the
new conditions. Overall, given the changes in the final amendments
relative to the proposed amendments, we do not expect the final
amendments to have a significant effect on the demand for proxy
advisory services, and hence efficiency.
---------------------------------------------------------------------------
\653\ See, e.g., letter from ISS.
---------------------------------------------------------------------------
2. Competition
The amendments' requirements that promote transparency and more
effective evaluation of 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 of interest (and, more broadly,
alignment of interest) and the reliability of proxy voting advice,
which could, in turn, cause proxy voting advice businesses to compete
more on those dimensions.
[[Page 55142]]
As discussed above, several commenters disagreed that the proposed
amendments would increase the quality or transparency of proxy advice,
which they thought was sufficient under the baseline, and stated that
the proposed amendments could reduce the quality of proxy advice if the
rule reduces the independence and diversity of thought amongst proxy
voting advice businesses.\654\ In that case, the rules may not increase
competition in the proxy advice market. However, as noted above, we
believe the final amendments' principles-based approach should address
many of these concerns because proxy voting advice businesses may, but
will no longer be required to, preview their proxy voting advice with
registrants.
---------------------------------------------------------------------------
\654\ See supra notes 646 and 651.
---------------------------------------------------------------------------
The final amendments could also have certain adverse effects on
competition. The final amendments will cause proxy voting advice
businesses to incur certain additional compliance costs as discussed in
Section II.C.2 above. How those costs will be shared between proxy
voting advice businesses and their clients depends on the ability of
proxy voting advice business to exercise market power in the pricing of
their services. One commenter noted that, although complaints about
pricing feature regularly in oligopolistic markets, proxy voting advice
business generally are not criticized for their pricing.\655\ The
commenter further explained that this might reflect clients' perception
that, due to the scale economies involved in proxy research, it is less
costly to purchase proxy voting advice than to engage in proxy research
themselves.\656\ The presence of these scale economies may provide
proxy voting advice businesses with substantial market power, including
the power to pass compliance costs associated with the final rules on
to their clients. If, however, as other commenters argued,\657\ clients
do not place a large value on proxy voting advice, then proxy voting
advice businesses may face limits in their ability to pass compliance
costs through to clients. In the Proposing Release, we acknowledged
that 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 amendments could decrease
competition.\658\ For the reasons described below, we do not believe
this will be the case with the final amendments.
---------------------------------------------------------------------------
\655\ See letter from C. Spatt.
\656\ Id.
\657\ See letters from B. Sharfman I and Manhattan Institute.
\658\ See Proposing Release at 66550.
---------------------------------------------------------------------------
Many commenters stated that the economic analysis in the Proposing
Release did not adequately consider the effects of the rule on
competition in the market for proxy advice.\659\ Some commenters
asserted that the cost burdens of the amendments, particularly those
associated with litigation exposure from registrants, would decrease
competition in the proxy advice market, raising barriers to entry in
the proxy advice market, and potentially forcing the exit of some proxy
voting advice businesses from the market.\660\ Several other commenters
argued that the proposed amendments would reduce competition by
creating new barriers to entry in what historically has been an
industry with few competitors.\661\ One commenter, a proxy voting
advice business in the U.K., stated that the Proposed Rule made it
highly unlikely it would enter the U.S. proxy voting advice business
market.\662\ Another commenter, however, stated that increased barriers
to entry would not reduce competition because, notwithstanding the
rule, entry would not occur because investors place little value on
proxy voting advice and financial incentives for entry are
correspondingly low.\663\ The final amendments reflect a principles-
based approach that is intended to limit the increased compliance costs
for proxy voting advice businesses and thus should reduce the potential
for significant adverse effects on competition.
---------------------------------------------------------------------------
\659\ See letters from CII IV; Richard B. Zabel, General Counsel
& Chief Legal Officer, Elliott Management Corporation (Mar. 30,
2020) (``Elliott II''); Felician Sisters II; Glass Lewis II; Good
Shepherd; IASJ; ISS; Interfaith Center II; Minerva I; New York
Comptroller II; Prof. Bebchuk; St. Dominic of Caldwell; ProxyVote
II. See also IAC Recommendation.
\660\ See letters from Prof. Bebchuk; TIAA; 62 Professors; CII
IV. See also IAC Recommendation.
\661\ See, e.g., letters from ISS; CII IV; Segal Marco II; Prof.
Sergakis; 62 Professors.
\662\ See letters from Minerva I.
\663\ See letter from Manhattan Institute.
---------------------------------------------------------------------------
Additionally, given certain industry practices, the costs
associated with the final amendments could affect proxy voting advice
businesses differently. For example, we understand that the three
existing proxy voting advice businesses that will be affected by the
final amendments already have processes in place for sharing certain
aspects of their analysis with certain registrants prior to making a
recommendation to clients, which they may be able to leverage to comply
with the new conditions. In contrast, firms considering entering the
market for proxy voting advice would need to develop such processes and
thus may initially experience somewhat higher costs in connection with
compliance with the final rules. A differential effect on costs across
proxy voting advice businesses could, in turn, affect competition
within the proxy voting advice business industry. Similarly, one
commenter stated that, if it were subject to the proposed amendments,
it likely would have to either significantly increase its fees or sell
their firm to one of the two dominant competitors.\664\ While that
commenter may not be subject to the final amendments,\665\ to the
extent that the costs associated with the final amendments
disproportionately affect proxy voting advice businesses without
existing processes that can be adapted to satisfy the new conditions,
particularly smaller proxy voting advice businesses that would
otherwise consider entering the market for proxy advice, the final
amendments could reduce competition in the market for proxy advisory
services. We expect the principles-based approach reflected in the
final amendments may help to ameliorate concerns about any differential
effect of the final amendments by affording proxy voting advice
businesses the flexibility to design policies and procedures that are
scaled to the scope of their operations and client base.
---------------------------------------------------------------------------
\664\ See letter from ProxyVote II.
\665\ See supra notes 170-173 and accompanying text.
---------------------------------------------------------------------------
Overall, we believe the benefits of improving the transparency,
accuracy, and completeness of information available to shareholders
when making voting decisions and enhancing the overall functioning of
the proxy voting process, in furtherance of Section 14 of the Exchange
Act would support adoption of the amendments notwithstanding any
adverse effect on competition arising therefrom.
3. Capital Formation
By facilitating the ability of clients of proxy voting advice
businesses to make informed voting determinations, the final 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 final amendments lead to more
investment, we could expect greater demand for securities, which could,
in turn, promote capital formation. Additionally, to the extent the
final amendments ameliorate frictions in the market for proxy voting
advice that may currently deter private companies from
[[Page 55143]]
becoming public reporting companies, the amendments could serve to
encourage more companies to become public.\666\
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\666\ See letters from Prof. Tingle (asserting that public
capital markets have become less attractive to companies that would
otherwise consider going public and that proxy voting advice
businesses have been singled out as possibly complicit in this
trend); TechNet (supporting the Proposed Rule as part of a
commitment to ``. . . make the U.S. the most attractive place in the
world for anyone to start a company, grow it here, and take it
public.'').
---------------------------------------------------------------------------
Several commenters stated that the proposal to allow registrants to
review draft proxy advice could lead to the misuse of material non-
public information.\667\ This possibility is predicated on an
expectation that a proxy voting advice business's recommendation could
have an influence on the outcome of a voting matter before
shareholders. For example, if a proxy voting advice business's
recommendation is likely to influence the outcome of a vote that is
expected to generate stock price reactions, then advance knowledge of
such a recommendation would be potentially valuable to facilitate
insider trading. Any such misuse of material non-public information
could reduce investor confidence in the integrity of markets and lead
to a reduction in capital formation. However, the final amendments do
not mandate that registrants be given prior access to draft proxy
voting advice. In addition, as discussed above, some form of registrant
pre-review already exists at each of the three major proxy voting
advice businesses, and we are not aware of any misuse of such
information.
---------------------------------------------------------------------------
\667\ See letters from CII IV; Glass Lewis II; ISS.
---------------------------------------------------------------------------
Overall, given the many factors that can influence the rate of
capital formation, any effect of the final amendments on capital
formation is expected to be small.
E. Reasonable Alternatives
1. Use a More Prescriptive Approach in the Final Amendments
Instead of a principles-based approach that allows proxy voting
advice businesses the flexibility to design their own measures to
ensure that clients have more complete and transparent information on
which to base their voting decisions, we could have used a more
prescriptive approach, such as the approach we proposed. For example,
we could have required proxy voting advice businesses to notify
registrants of their advice or provide their clients with registrants'
responses to that advice in certain specific ways and time frames. Such
a prescriptive approach could have reduced legal uncertainty for proxy
voting advice businesses, but it would have generated greater
compliance costs for proxy voting advice businesses, some or all of
which could have been passed on to their clients. The principles-based
approach we are adopting provides a significant degree of flexibility
to proxy voting advice businesses in deciding the best way to ensure
that more complete and transparent information is available to their
clients, and we expect that it will significantly reduce their
compliance costs.
2. Require Proxy Voting Advice Businesses To Include Full Registrant
Response in the Businesses' Voting Advice
Rather than requiring proxy voting advice businesses to adopt and
publicly disclose written policies and procedures reasonably designed
to ensure that such businesses provide clients with a mechanism by
which the clients can reasonably be expected to become aware of
registrant responses to proxy voting advice, we could require proxy
voting advice businesses to include the registrant's full response in
the proxy voting advice itself. Including the registrant's full
response in the proxy voting advice would benefit clients of proxy
voting advice businesses by allowing them to avoid the additional step
of accessing the response. Including a full response in the voting
advice provided by proxy voting advice businesses also could benefit
registrants by having their responses more prominently displayed,
depending on where in the advice the response is included. Two
commenters suggested this as an appropriate alternative to the proposed
amendments.\668\
---------------------------------------------------------------------------
\668\ See letters from NAM; BIO.
---------------------------------------------------------------------------
However, requiring inclusion of the registrant's full response in
the proxy 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.
3. Public Disclosure of Conflicts of Interest
The final 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. In addition, one commenter noted
that publicly disclosing conflicts could undermine the information
barriers put in place between the consulting and proxy advice side of a
proxy voting advice business's operations.\669\
---------------------------------------------------------------------------
\669\ See letter from ISS.
---------------------------------------------------------------------------
4. Require Additional or Alternative Mandatory Disclosures in Proxy
Voting Advice
In addition to requiring the adopted conflicts of interest
disclosures, we could amend Rule 14a-2(b)(9) to 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
specificity required, may result in competitive consequences to proxy
voting advice businesses. In light of these considerations, the adopted
rules will not require such disclosures in all instances.
One commenter noted a suggestion from the 2010 Concept Release that
``proxy advisory firms could provide increased disclosure regarding the
extent of research involved with a particular recommendation and the
extent and/or effectiveness of its controls and procedures in ensuring
the accuracy of registrant data.'' \670\ The commenter also highlighted
another suggestion from the Concept Release noting that the
Commission's rules that govern NRSROs ``may be useful
[[Page 55144]]
templates for developing a regulatory program addressing conflicts of
interest and other issues with respect to the accuracy and transparency
of voting recommendations provided by proxy advisory firms.'' The
commenter stated that these two approaches should have been considered
as alternatives to the rule. We have considered the alternative of
requiring additional disclosure regarding the methods and procedures
used to develop proxy voting advice, but believe it is preferable to
avoid being overly prescriptive about the content of the report for a
particular registrant/recommendation. Instead, for the reasons
discussed throughout this release, we believe it is more appropriate to
focus on principles that will allow the clients of proxy voting advice
businesses to have access to more complete and transparent information
upon which to make a voting decision, while providing flexibility to
proxy voting advice businesses to determine the best means to satisfy
those principles. Moreover, while we recognize that other regulatory
regimes may take different approaches to similar issues, we note that
the role of NRSROs and proxy voting advice businesses differ from one
another and that following a similar regulatory approach might not be
appropriate. We also recognize that the costs and benefits of NRSRO
regulation differ from the costs and benefits of potential additional
regulation of proxy voting advice businesses. The principles-based
approach reflected in the final amendments is tailored to the unique
role played by proxy voting advice businesses in the proxy process and
is intended to be adaptable to existing market practices.
---------------------------------------------------------------------------
\670\ See letter from Glass Lewis II.
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5. Require Disabling or Suspension of Pre-Populated and Automatic
Submission of Votes
The final 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 electronic voting platform to disable or
suspend the automatic submission of votes in instances where a
registrant indicates that it intends to file (or has filed) a response
to the voting advice as additional soliciting materials. Alternatively,
we could require such a condition. Another alternative would be to
require that the proxy voting advice business refrain from pre-
populating a client's voting choices once a registrant indicates it
intends to file a response, indefinitely or for a period of time, and
subject to conditions. Several commenters supported an alternative that
would generally limit or disable the automatic submission of votes,
claiming it would lead to more informed proxy voting, though these
commenters did not necessarily condition such limitations on the filing
of a registrant response.\671\
---------------------------------------------------------------------------
\671\ See letters from BRT; NAM; BIO. But see, e.g., letters
from CII IV; Dan Jamieson (Jan. 16, 2020); IAA; ISS; New York
Comptroller II.
---------------------------------------------------------------------------
We recognize that these pre-population and automatic submission
functions may enable proxy voting advice business clients to vote their
proxies prior to registrants being able to provide a response to the
proxy voting advice. We also recognize that disabling or suspending
these functions when registrants have indicated they intend to file
responses to voting advice could benefit the clients of proxy voting
advice businesses to the extent that it increases the likelihood that
the clients of the proxy voting advice businesses would review the
registrants' responses, and take them into consideration, before voting
their proxies. At the same time, depending on how such a measure is
implemented and conditioned, such an alternative could give rise to
timing pressures and other logistical challenges. For example,
disabling these functions permanently under certain circumstances could
increase costs for clients if they need to devote greater resources to
managing the voting process as a result, which may in turn also reduce
the value of the services of the proxy voting advice businesses.
We have declined to adopt such a prescriptive approach at this
time, but rather have focused on an incremental principles-based
approach in order to see how practice develops in light of the changes
being adopted. The amendments we are adopting are intended to make
clients of proxy voting advice businesses aware of a registrant's views
about proxy voting advice in a timely manner, which could assist these
clients in making voting determinations. Further, the Commission has
provided investment advisers, who often engage proxy voting advice
businesses to provide voting related services, with additional guidance
regarding how they could consider their policies and procedures
regarding these types of automated voting functions.\672\
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\672\ See Supplemental Proxy Voting Guidance.
---------------------------------------------------------------------------
6. Exempt Smaller Proxy Voting Advice Businesses From the Additional
Conditions to the Exemptions
As discussed in Section III.C.2 above, given certain industry
practices, the costs associated with the final amendments may be
different for certain proxy voting advice businesses. For example, the
three major proxy voting advice businesses have processes in place for
sharing certain aspects of their analysis with certain registrants
prior to making a recommendation to clients, which they may be able to
leverage to comply with the new conditions. However, it is possible
that entrants to this market (which could be smaller than the existing
three major proxy voting advice businesses) would have to develop new
processes to meet the conditions for exemption under the final
amendments if they choose to engage in the types of activities that
fall within the scope of Rule 14a-1(l)(1)(iii). Some of the costs of
developing these new processes are likely fixed, and do not vary with
the number of issuers a proxy voting advice business covers or the
number of clients it serves. Thus, the costs associated with the final
amendments could affect potential entrants into the market for proxy
advice that are smaller businesses more than the existing three major
proxy voting advice businesses. To the extent the costs associated with
the final amendments disproportionately affect smaller proxy voting
advice businesses that might consider entering the market in the
future, the final amendments could reduce 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). Several
commenters supported such an alternative.\673\ Exempting smaller proxy
voting advice businesses from the additional conditions would reduce
the cost of the final amendments for such businesses, and could thus
facilitate the entry of new proxy voting advice businesses. However, we
expect the costs associated with the final amendments to be much
smaller compared to the initial costs of setting up the business,
including building a reputation for providing quality services, which
any newcomer will have to incur. Also, such an exemption would mean
that clients of these proxy voting advice businesses would not realize
the same benefits as clients of incumbent firms in terms of potential
improvements in the accuracy, completeness, and transparency of the
information available to them when
[[Page 55145]]
they make voting decisions.\674\ Moreover, as we have discussed in
prior sections, we anticipate that the principles-based approach we are
adopting is likely to result in more modest costs increases for proxy
voting advice businesses than the more prescriptive approach we
proposed, which should moderate the impact of the final amendments on
smaller potential entrants.
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\673\ See letters from SHARE II; CII IV; Manhattan Institute.
One commenter more generally argued that the Commission should
``adopt policies that would ease entry and participation in the
market.'' See letters from Elliott I, Prof. Li.
\674\ See letter from SES.
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7. Require a Narrower Scope of Registrant Notice
A number of commenters suggested that registrants should only be
allowed to review the facts that a proxy voting advice business uses in
determining its voting recommendation, particularly if we proceeded
with a requirement that registrants review draft proxy voting reports
before they are sent to clients.\675\ For example, rather than
providing a full copy of its voting advice, a proxy voting advice
business could provide a summary thereof, setting forth the facts it
uses without specifying further details.
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\675\ See letters from ISS at 57; MFA & AIMA at 2; State Street
at 3; CFA Institute at 2, 8; CIRCA at 22; Glass Lewis II at 22-23;
IAC at 8-9.
---------------------------------------------------------------------------
We note that while the principles-based approach we are adopting
does not dictate precisely how a proxy voting advice business provides
notice of proxy voting advice to registrants, the final amendments
require that proxy voting advice businesses share the full proxy voting
report with registrants. Although we acknowledge that commenters'
suggested alternative may be less costly for proxy voting advice
businesses to implement, we believe that providing registrants with the
full contents of proxy voting reports is necessary to achieve the
Commission's objective of facilitating informed proxy voting decisions.
Providing registrants with the full contents of the report gives
registrants the opportunity to file additional soliciting materials
that discuss not only the facts underlying the proxy voting advice
business's recommendations, but also the methodology and analysis the
proxy voting advice business used to arrive its recommendations. In
deciding how to vote on a proxy matter, clients of proxy voting advice
businesses may benefit from that additional discussion. As a result, we
anticipate the final amendments will more effectively facilitate
clients' assessment of proxy voting advice than this alternative.
Moreover, because the final amendments do not require an opportunity
for pre-publication review, we believe that the cost of sharing full
reports will be more modest under the final amendments than under the
proposed amendments.
VI. Paperwork Reduction Act
A. Background
Certain provisions of our rules, schedules, and forms that will be
affected by the amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\676\ We published a notice requesting comment on changes to
these collection of information requirements in the Proposing Release
and submitted these requirements to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA.\677\ The hours and
costs associated with maintaining, disclosing, or providing the
information required by the 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).
---------------------------------------------------------------------------
\676\ 44 U.S.C. 3501 et seq.
\677\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------
The Commission adopted existing Regulation 14A \678\ 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.\679\
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\678\ 17 CFR 240.14a-1 et seq.
\679\ 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.
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A detailed description of the amendments, including the need for
the information and its 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 amendments can be found in Section IV
above.
B. Summary of Comment Letters to PRA Estimates
The Commission received three comment letters in response to its
request for comment on the PRA estimates and analysis included in the
Proposing Release.\680\ These commenters expressed concern that the
estimates were not representative of actual impacts and that the
analysis failed to properly account for the paperwork burden that would
be incurred, in particular, by proxy voting advice businesses.\681\ Two
of the commenters asserted that the Commission's analysis understated
the magnitude of the hourly and cost burdens that the proposed
amendments would impose.\682\ One of those commenters provided detailed
estimates of its expected annual compliance burden for each of the
components of the proposed amendments.\683\
---------------------------------------------------------------------------
\680\ See letters from IASJ; Glass Lewis I; ProxyVote I.
\681\ See id.
\682\ See letters from Glass Lewis I; ProxyVote I.
\683\ See letter from Glass Lewis I.
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C. Burden and Cost Estimates for the Amendments
Below we estimate the incremental and aggregate effect on paperwork
burden as a result of the amendments. As discussed in Section II above,
we have made a number of changes from the proposed amendments, most
notably to shift to a principles-based approach in Rule 14a-
2(b)(9)(ii), and we have adjusted our estimates accordingly.
The burden estimates were calculated by (i) estimating the number
of parties expected to expend time, effort, and/or financial resources
to generate, maintain, retain, disclose or provide information required
by the amendments, and then (ii) multiplying this number by the
estimated amount of time, on average, each of these parties would
devote in order to comply with these new requirements over and above
their existing compliance burden associated with Regulation 14A. These
estimates represent the average burden for all respondents, both large
and small. In deriving our estimates, we recognize that the burdens
will likely vary among individual respondents based on a number of
factors, including the nature and conduct of their business.
1. Impact on Affected Parties
As discussed above in Section IV.B.1., there are a variety of
parties that may be affected, directly or indirectly, by the
amendments. These include proxy voting advice businesses; the clients
to
[[Page 55146]]
whom these businesses provide voting advice; investors and other groups
on whose behalf the clients of proxy voting advice business make voting
determinations; registrants who are conducting solicitations and are
the subject of proxy voting advice; and the registrants' shareholders,
who ultimately bear the costs and benefits to the registrant associated
with the outcome of voting matters covered by proxy voting advice.
Of these parties, we expect that proxy voting advice businesses
and, to a lesser extent, registrants that are the subject of the proxy
voting advice, would incur some additional paperwork burden resulting
from the amendments.\684\ As discussed further below, we believe that
any incremental burden would be attributable primarily to new Rule 14a-
2(b)(9). With respect to the amendments to Rule 14a-1(l) and Rule 14a-
9, we do not expect the economic impact of these amendments will be
significant because they do not change existing law and therefore do
not change respondents' legal obligations.\685\ Moreover, any impact
arising from these amendments is not expected to materially change the
average PRA burden hour estimates associated with Regulation 14A. We
therefore have not made any adjustments to our PRA burden estimates in
respect of these amendments.
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\684\ The PRA requires that we estimate ``the total annual
reporting and recordkeeping burden that will result from the
collection of information.'' [5 CFR 1320.5(a)(1)(iv)(B)(5)] A
``collection of information'' includes any requirement or request
for persons to obtain, maintain, retain, report, or publicly
disclose information [5 CFR 1320.3(c)]. OMB's current inventory for
Regulation 14A, therefore, is an assessment of the paperwork burden
associated with such requirements and requests under the regulation,
and this PRA is an assessment of changes to such inventory expected
to result from adoption of the amendments. While other parties, such
as the clients of proxy voting advice businesses, may have costs
associated with the amendments (see supra Section IV.C.), only proxy
voting advice businesses and registrants will incur any additional
paperwork burden in order to comply with or respond to the
informational requirements of the amendments.
\685\ The amendments to Rule 14a-1(l) codify existing Commission
interpretations and views about the applicability of the Federal
proxy rules to proxy voting advice and are not expected to have a
significant economic impact. See supra Section IV.C.2.b. The
amendments to Rule 14a-9 may impose direct costs on proxy voting
advice businesses to the extent the amended rule prompts some proxy
voting advice businesses to provide additional disclosure about the
bases for their voting advice. However, we expect any such costs to
be minimal, especially given that the examples in new paragraph (e)
of the Note to Rule 14a-9 were included in prior Commission
guidance. See supra Section IV.C.4.b. One commenter argued that
proxy voting advice businesses and their legal counsel would devote
significant time and effort to review and respond to feedback
received from registrants so as to protect the business from private
litigation claims stemming from Rule 14a-9, as amended. See letter
from Glass Lewis I. While the commenter mentioned the proposed
amendment to Rule 14a-9, we read this comment as primarily relating
to the proposed review and feedback proposal, which we are not
adopting. We do not believe that the amendment to Rule 14a-9
represents a change to existing law, nor does it broaden the concept
of materiality or create a new cause of action, as some commenters
have suggested. See discussion supra Section II.D.3.
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a. Proxy Voting Advice Businesses
In the Proposing Release, the Commission estimated that each proxy
voting advice business would incur an aggregate yearly increase in
burden of 500 hours due to the proposed amendments.\686\ In recognition
of the changes from the proposal as well as in consideration of the
comments received regarding the paperwork burdens of the proposed
amendments,\687\ we have adjusted our estimates of the burdens on proxy
voting advice businesses.
---------------------------------------------------------------------------
\686\ See Proposing Release, PRA Table 1 ``Calculation of
Increase in Burden Hours Resulting from the Proposed Amendments,''
at 66553. The Commission estimated that, for each proxy voting
advice business, the burden would be 1,000 hours in the first year
following adoption and 250 hours in each of the following years, for
a three-year average of 500 burden hours. Id. at note d. to Table 1.
Given the Commission's assumption at the proposing stage that there
were five proxy voting advice businesses, the average of 500 hours
was multiplied by five to arrive at a total of 2,500 hours.
\687\ See supra note 682.
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Proxy voting advice businesses are expected to incur an increased
burden as a result of new Rule 14a-2(b)(9), which will apply to anyone
relying on the exemptions in Rules 14a-2(b)(1) or (b)(3) who furnishes
proxy voting advice covered by Rule 14a-1(l)(1)(iii)(A). The amount of
the burden will depend on a number of factors that are firm-specific
and highly variable, which makes it difficult to provide reliable
quantitative estimates.\688\
---------------------------------------------------------------------------
\688\ See generally the discussion supra in Sections
IV.C.3.a.ii. and b.ii. concerning the difficulty in providing
quantitative estimates of the costs to proxy voting advice
businesses imposed by the amendments.
---------------------------------------------------------------------------
There are three components of new Rule 14a-2(b)(9) that we expect
to result in an increased burden. First, in accordance with Rule 14a-
2(b)(9)(i), proxy voting advice businesses will be required to include
in their proxy voting advice (or in an electronic medium used to
deliver the advice) disclosure of conflicts of interest specifically
tailored to proxy voting advice businesses and the nature of their
services.\689\ Second, under Rule 14a-2(b)(9)(ii)(A), proxy voting
advice businesses will be required to adopt and publicly disclose
written policies and procedures reasonably designed to ensure that
registrants that are the subject of the proxy voting advice have such
advice made available to them at or prior to the time such advice is
disseminated to the proxy voting advice business's clients. Third,
under Rule 14a-2(b)(9)(ii)(B), the proxy voting advice business will be
required to adopt and publicly disclose written policies and procedures
reasonably designed to ensure that the proxy voting advice business
provides clients with a mechanism by which they can reasonably be
expected to become aware of a registrant's written statements about the
proxy voting advice in a timely manner before the shareholder meeting.
The amendments also provide non-exclusive safe harbors that the proxy
voting advice businesses may use to satisfy the principle-based
requirements in Rule 14a-2(b)(9)(ii). We address each of these three
components in turn.
---------------------------------------------------------------------------
\689\ Rule 14a-2(b)(9)(i).
---------------------------------------------------------------------------
With respect to the conflicts of interest disclosure in new Rule
14a-2(b)(9)(i), the facts and circumstances unique to each proxy voting
advice business, including the conflicts of interest disclosures it
currently provides to its clients as well as the nature of its material
interests, transactions, and relationships, will dictate the additional
disclosure, if any, it must provide under the final rule. For example,
to the extent that proxy voting advice businesses are already providing
the kind of conflicts of interest disclosure required by the rule, it
would reduce their new compliance burden. Another factor that
complicates the calculation of burden is the principles-based nature of
the conflicts disclosure requirement, which eschews prescriptive
disclosure standards in favor of providing proxy voting advice
businesses the flexibility to determine which situations merit
disclosure and the specific details to provide to their clients about
any conflicts of interest identified. While this flexibility in the
rule's application is beneficial for both proxy voting advice business
and their clients, it limits our ability to predict the associated
paperwork burden. Under the rule, a proxy voting advice business's
disclosure could differ for each registrant and be subject to change in
the future as both the business's and its clients' circumstances
change.
One proxy voting advice business estimated that its burden
associated with the identification and disclosure of conflicts of
information under the proposed rules would add 5,969 burden hours each
year.\690\ While we believe
[[Page 55147]]
that the principles-based focus of the adopted requirement, in tandem
with a proxy voting advice business's existing conflicts disclosure
systems and practices (particularly as to registrants that have been
the focus of the business's proxy coverage in prior years), could
significantly mitigate any increased paperwork burden corresponding to
the new rules, we think it is appropriate to increase our estimates to
align more closely with this commenter's input. Accordingly, we
estimate the conflicts of interest disclosure in new Rule 14a-
2(b)(9)(i) to result in 6,000 additional burden hours per proxy voting
advice business.
---------------------------------------------------------------------------
\690\ See letter from Glass Lewis I. Glass Lewis calculated that
it issued 5,565 total proxy research reports on U.S. companies in
2018. Assuming one hour spent for each report to identify any
potential conflicts and another .5 hours to prepare conflicts
disclosure regarding 807 of the 5,565 registrants for whom Glass
Lewis determined it had disclosable conflict information, Glass
Lewis estimated an increased burden of 5,969 hours annually to
comply with the new conflicts of disclosure requirements in proposed
Rule 14a-2(b)(9)(i).
---------------------------------------------------------------------------
The remainder of the additional paperwork burden associated with
the amendments will derive from the requirements of Rules 14a-
2(b)(9)(ii)(A) and (B). Because these rules have been designed to
permit proxy voting advice businesses substantial flexibility over the
manner in which they comply, we expect those businesses will implement
mechanisms differently depending on, among other things, the facts and
circumstances of their particular business operations and the nature of
their client bases.\691\ Furthermore, some proxy voting advice
businesses may already have systems sufficient to address some or all
of the mechanics required to comply with Rules 14a-2(b)(9)(ii)(A) and
(B),\692\ which would be expected to limit their overall burden but
cannot be precisely estimated.
---------------------------------------------------------------------------
\691\ As one example, to be eligible for the safe harbor in Rule
14a-2(b)(9)(iv), a proxy voting advice business has the option to
provide notice on its electronic client platform that the registrant
has filed additional soliciting materials, or it could choose to
provide notice through email or other electronic means. Both
mechanisms for informing clients could involve initial set-up costs
as well as ongoing costs that are hard to predict. Since they are
not required to rely on the safe harbor, proxy voting advice
businesses may also put in place other mechanisms to inform their
clients of a registrant's views about the proxy voting advice, which
could be more or less costly than satisfying the conditions of the
safe harbor.
\692\ See supra note 609 in Section IV.C.3.b.2.
---------------------------------------------------------------------------
It appears that the more prescriptive nature of the proposed
amendment regarding registrants' and certain other soliciting persons'
advance review and response to proxy voting advice was a large driver
of the hourly and cost burdens discussed by commenters. We believe the
flexibility afforded by the principles-based approach reflected in the
final rules should therefore result in significantly lower costs for
proxy voting advice businesses and their clients than under the
proposal.\693\
---------------------------------------------------------------------------
\693\ For example, one commenter enumerated a number of elements
of the proposal that it believed would have an impact on a proxy
voting advice business's paperwork burden and provided estimates of
the hourly burden expected to be incurred that totaled 59,999 burden
hours. Of this amount, we have already addressed and incorporated
the 5,969 hours estimate regarding identifying and disclosing
conflicts. See supra note 690. We address the 19,648 hour estimate
regarding confidentiality agreements below. We believe the remaining
34,382 burden hours pertained to elements of the proposed rules that
are not directly relevant in light of our revisions in favor of a
more principle-based framework that no longer requires mandatory
review and feedback periods. See letter from Glass Lewis I.
---------------------------------------------------------------------------
We believe that much of the burden of the final amendments would be
for the proxy voting advice business to develop policies that satisfy
the principles and accordingly modify or develop systems and practices
to implement such policies. To derive an estimate for these costs, we
start with our estimated number of registrants filing proxy materials
annually, which is 5,690.\694\ We estimate that the burden on a proxy
voting advice business in setting up, modifying, and implementing such
policies and systems would involve approximately one half-hour per
registrant (2,845 hours) for the notice to registrants under Rule 14a-
2(b)(9)(ii)(A) and one half-hour per registrant (2,845 hours) for the
notice to clients of any response by the registrants under Rule 14a-
2(b)(9)(ii)(B).\695\ Our revised estimates take into consideration our
understanding that some proxy voting advice businesses have systems and
practices in place that may complement or overlap with the new
requirements, which could substantially mitigate any increases to their
overall burden. Also, these estimates represent the average annual
burden increase over three years, as we assume that the burden would be
greatest in the first year after adoption as proxy voting advice
businesses incorporate the new requirements into their existing
practices and procedures, but would be less in subsequent years.
---------------------------------------------------------------------------
\694\ See supra note 549.
\695\ In deriving our estimates of one half-hour per registrant
for each of Rule 14a-2(b)(9)(ii)(A) and Rule 14a-2(b)(9)(ii)(B), we
considered estimates provided by one commenter who estimated that
the ``Implementation of final notice period'' component of the
proposal would impose a burden of 0.5 hours per registrant, as would
the ``Process, review and implement requests for a hyperlinked
response'' component. See letter from Glass Lewis I. While these two
proposed components are not part of the final rules, they are in
some ways analogous to the two principles for which proxy voting
advice businesses may need to implement systems under the final
rules. Accordingly, we believe one half-hour burden per registrant
for each of these components is an appropriate estimate as to the
burden on each proxy voting advice business.
---------------------------------------------------------------------------
In addition to these system-related costs, we expect that the proxy
voting advice businesses would, as a general matter, obtain
acknowledgments or agreements with respect to the use of any
information shared with a registrant, as we expect that the business
would seek to limit disclosure of its report. Given that the rules do
not require proxy voting advice businesses to give pre-release copies
of proxy voting advice to registrants, in contrast to the proposal, we
believe the need for proxy voting advice businesses to individually
negotiate and secure detailed confidentiality agreements from
registrants will be substantially lessened. This is particularly true
to the extent that a proxy voting advice business already maintains a
practice of providing copies of its proxy voting advice to registrants
and can therefore utilize its existing practices with respect to
confidentiality provisions. This would include, for example, the
practice of requiring registrants to agree to or acknowledge certain
terms of use before accessing the proxy voting advice. In this regard,
we note that some proxy voting advice businesses currently provide
reports to registrants without requiring formal confidentiality
agreements, instead requiring only an electronic acknowledgement of
terms of use.\696\
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\696\ See supra note 615. For example, Glass Lewis requires a
registrant to click and acknowledge/accept/agree to certain ``terms
of use'' before being able to access the notice and recommendations.
---------------------------------------------------------------------------
We recognize that there nevertheless may be some hourly and cost
burden associated with a proxy voting advice business's efforts to
obtain acknowledgements \697\ or other kinds of agreements with
registrants before sharing proxy voting advice materials and that there
could be a range of approaches. One approach may be to develop a
standardized form of acknowledgement regarding the report's terms of
use and implementing systems to track the acknowledgments. Under such
an approach, we estimate that each proxy voting advice business would
incur 100 hours in the first year of compliance to draft such
standardized terms of use and update systems to implement and track it,
and 25 hours each year thereafter to implement the terms of use and
systems on a going-forward basis, for a three-year average of 50 hours
per year per proxy voting advice business associated with securing an
acknowledgment or other assurance that the proxy advice will not
[[Page 55148]]
be disclosed. However, we recognize that proxy voting advice businesses
could choose instead to negotiate individual terms of use with each
registrant. As a result of modifications we have made from the proposal
in response to commenters, we anticipate that the burden in those cases
would nonetheless be significantly less than the four hours per issuer
burden estimate provided by a commenter regarding the proposal.\698\ We
estimate an average burden of one hour per registrant \699\ under those
circumstances, for a total estimate of 5,690 hours per year associated
with securing an acknowledgment or other assurance that the proxy
advice will not be disclosed. Accordingly, depending on which approach
a proxy voting advice business chooses, we expect that the burden could
range from 50 hours to 5,690 hours per year per proxy voting advice
business. Given current practices, we expect that proxy voting advice
business would generally seek to rely on standardized terms of use.
Nevertheless, for purposes of this PRA analysis, and so as to not
underestimate the burden, we use an estimate of 5,690 hours per proxy
voting advice business to obtain acknowledgments.
---------------------------------------------------------------------------
\697\ See paragraph (B) of the Rule 14a-2(b)(9)(iii) safe
harbor.
\698\ See letter from Glass Lewis I.
\699\ Out of the estimated 18,534 registrants that may be
affected to a greater or lesser extent by the final amendments,
5,690 filed proxy materials with the Commission during calendar year
2018. See Section IV.B.1. and supra note 549.
---------------------------------------------------------------------------
Overall, we believe that proxy voting advice businesses will incur
an annual incremental paperwork burden to comply with Rule 14a-2(b)(9)
as follows.
------------------------------------------------------------------------
Proxy voting advice business
New requirement estimated incremental annual
compliance burden
------------------------------------------------------------------------
Rule 14a-2(b)(9)(i)--Conflicts Increase in paperwork burden
Disclosure. corresponding to:
Proxy voting advice business must To the extent that the proxy
include conflicts of interest voting advice business's
disclosure in its proxy voting advice current practices and
(or electronic medium used to deliver procedures do not already
the advice), as well as a discussion satisfy the requirement:
of any policies and procedures used to Identification and
identify and address conflicts, and disclosure to clients of
any actual steps taken to address any qualifying conflicts of
conflicts. interest. Includes burden
associated with internal
processes and procedures for:
[cir] Reviewing and preparing
disclosures describing
conflicts of interest,
relevant conflicts policies
and procedures, and actual
steps taken to address
conflicts identified;
[cir] Developing and
maintaining methods for
tracking conflicts of
interest;
[cir] Seeking legal or other
advice; and
[cir] Updating electronic
client platforms, as
applicable.
We estimate the increase in
paperwork burden to be 6,000
hours per proxy voting advice
business.
Rule 14a-2(b)(9)(ii)(A)--Notice to Increase in paperwork burden
Registrants and Rule 14a-2(b)(9)(iii) corresponding to:
Safe Harbor.
The proxy voting advice business has To the extent that the proxy
adopted and publicly disclosed written voting advice business's
policies and procedures reasonably current practices and
designed to ensure that registrants procedures are not already
who are the subject of proxy voting sufficient:
advice have such advice made available Developing new or
to them at or prior to the time the modifying existing systems,
advice is disseminated to clients of policies and methods, or
the proxy voting advice business. developing and maintaining new
Safe Harbor--The proxy voting systems, policies and methods
advice business has written policies to ensure that it has the
and procedures that are reasonably capability to timely provide
designed to provide a registrant with each registrant with
a copy of the proxy voting advice information about its proxy
business's proxy voting advice, at no advice necessary to satisfy
charge, no later than the time it is the requirement in Rule 14a-
disseminated to the business's 2(b)(9)(ii)(A) and/or the safe
clients. Such policies and procedures harbor in Rule 14a-
may include conditions requiring that:. 2(b)(9)(iii).
(A) The registrant has filed its If applicable,
definitive proxy statement at least 40 obtaining acknowledgments or
calendar days before the security agreements with respect to use
holder meeting date (or if no meeting of any information shared with
is held, at least 40 calendar days the registrant; and
before the date the votes, consents, Delivering copies of
or authorizations may be used to proxy voting advice to
effect the proposed action); and. registrants.
(B) The registrant has acknowledged We estimate the increase in
that it will only use the copy of the paperwork burden to be 8,535
proxy voting advice for its internal hours per proxy voting advice
purposes and/or in connection with the business, consisting of 2,845
solicitation and it will not be hours for system updates and
published or otherwise shared except 5,690 hours for
with the registrant's employees or acknowledgments regarding
advisers. sharing information.
[[Page 55149]]
Rule 14a-2(b)(9)(ii)(B)--Notice to Increase in paperwork burden
Clients of Proxy Voting Advice corresponding to:
Businesses and Rule 14a-2(b)(9)(iv) To the extent that the proxy
Safe Harbor. voting advice business's
The proxy voting advice business has current practices and
adopted and publicly disclosed written procedures are not already
policies and procedures reasonably sufficient:
designed to ensure that the proxy Developing new or
voting advice business provides modifying existing systems,
clients with a mechanism by which they policies and methods, or
can reasonably be expected to become developing and maintaining new
aware of any written statements systems, policies and methods
regarding proxy voting advice by capable of:
registrants who are the subject of [cir] Tracking whether the
such advice, in a timely manner before registrant has filed
the shareholder meeting. additional soliciting
Safe harbor--The proxy voting materials;
advice business has written policies [cir] Ensuring that proxy
and procedures that are reasonably voting advice businesses
designed to inform clients who receive provide clients with a means
the proxy voting advice when a to learn of a registrant's
registrant that is the subject of such written statements about proxy
voting advice notifies the proxy voting advice in a timely
voting advice business that it intends manner that satisfies the
to file or has filed additional requirement in Rule 14a-
soliciting materials with the 2(b)(9)(ii)(B) and/or the safe
Commission setting forth the harbor in Rule 14a-
registrant's statement regarding the 2(b)(9)(iv).
voting advice, by:. If relying on the safe
(A) Providing notice to its clients on harbor in Rule 14a-
its electronic client platform that 2(b)(9)(iv)(A) or (B), the
the registrant intends to file or has associated paperwork burden
filed such additional soliciting would include the time and
materials and including an active effort required of the proxy
hyperlink to those materials on EDGAR voting advice businesses firm
when available; or. to:
(B) The proxy voting advice business [cir] Provide notice to its
providing notice to its clients clients through the business's
through email or other electronic electronic client platform or
means that the registrant intends to email or other electronic
file or has filed such additional medium, as appropriate, that
soliciting materials and including an the registrant intends to file
active hyperlink to those materials on or has filed additional
EDGAR when available. soliciting materials setting
forth its views about the
proxy voting advice; and
[cir] include a hyperlink to
the registrant's statement on
EDGAR
We estimate the increase in
paperwork burden to be 2,845
hours per proxy voting advice
business.
--------------------------------
Total.............................. 17,380 hours per proxy voting
advice business.
------------------------------------------------------------------------
Altogether, we estimate an annual total increase of 52,640 hours
\700\ in compliance burden to be incurred by proxy voting advice
businesses that would be subject to the amendments to Rule 14a-2(b)(9).
We assume that the burden would be greatest in the first year after
adoption, as proxy voting advice businesses incorporate the new
requirements into their existing practices and procedures.
---------------------------------------------------------------------------
\700\ This represents the annual total burden increase expected
to be incurred by proxy voting advice businesses (as an average of
the yearly burden predicted over the three-year period following
adoption) and is intended to be inclusive of all burdens reasonably
anticipated to be associated with compliance with the conditions of
Rule 14a-2(b)(9). The Commission is aware of three businesses in the
U.S. (i.e., Glass Lewis, ISS, and Egan-Jones) whose activities fall
within the scope of proxy voting advice constituting a solicitation
under amended Rule 14a-1(l)(1)(iii)(A). We estimate that each of
these will have a burden of 17,380 hours per year. We recognize that
there could be other proxy voting advice businesses, including both
smaller firms and firms operating outside the U.S., which may also
be subject to the final rules. However, we expect such a number to
be small. Accordingly, rather than increasing our estimate of the
number of affected proxy voting advice businesses beyond the three
discussed above, we are increasing our annual total burden estimate
by 500 hours to account for those businesses. As a result, the
annual total burden that we estimate will result from this amendment
will be: (17,380 x 3) + 500 = 52,640 hours.
---------------------------------------------------------------------------
b. Registrants
In addition to proxy voting advice businesses, we anticipate that
registrants would incur some additional paperwork burden as a result of
the amendments. Registrants could experience increased burdens
associated with coordinating with proxy voting advice businesses to
receive the proxy voting advice, reviewing the proxy voting advice, and
preparing and filing supplementary proxy materials in response to the
proxy voting advice, if they choose to do so.
As the rules do not require registrants to engage with proxy voting
advice businesses or take any action in response to proxy voting
advice, we expect a registrant would bear additional paperwork burden
only if it anticipated the benefits of engaging with the proxy voting
advice business would exceed the costs of participation. These costs
will vary depending upon the particular facts and circumstances of the
proxy voting advice and any issues identified therein, as well as the
resources of the registrant, which makes it difficult to provide a
reliable quantifiable estimate of these costs. Nevertheless, in the
Proposing Release, the Commission stated its belief that the
corresponding burden on registrants would be not significant in most
cases, particularly when averaged among all affected registrants.\701\
As such, the Commission estimated that registrants would each incur, on
average, an increase of ten additional burden hours each year, for a
total increase among all registrants of 18,970 hours annually.\702\
---------------------------------------------------------------------------
\701\ See Proposing Release, PRA Table 1 at 66553 and note e of
the table.
\702\ Id.
---------------------------------------------------------------------------
In consideration of commenters' views that the Commission's
estimates were too low,\703\ we have adjusted our prior burden
estimates upward. Nevertheless, we do not believe the annual burden to
be incurred by an individual registrant would be considerably greater
than was reflected in the Proposing Release, particularly in light of
the modifications we are making to the registrant review process that
was originally proposed. For example, the rules as adopted do not
mandate that registrants be afforded fixed periods of review of proxy
voting advice, as was the case with the proposal.\704\ Furthermore, our
estimates consider the extent to which some registrants' current
practices and procedures may already involve reviewing proxy voting
advice businesses' voting advice, filing additional soliciting
materials, and some amount of investor outreach in response to adverse
voting recommendations. Assuming that a
[[Page 55150]]
registrant's annual meeting of shareholders is covered by at least two
of the three major U.S. proxy voting advice businesses, and the
registrant has opted to review both sets of proxy advice and file
additional soliciting materials in response, we estimate an average
increase of 50 hours per registrant in connection with the amendments
for a total annual increase of 284,500 hours.\705\ As discussed above,
however, it is difficult to predict the effect of the amendments on a
registrant's paperwork burden with a great degree of precision.
---------------------------------------------------------------------------
\703\ See letters from Glass Lewis I (``. . . the ten hour
estimate and resulting burden hour estimate is both unsupported and
likely significantly understated'') and ProxyVote I (``We believe
the Proposed Rulemaking significantly understates the actual burden
imposed on ProxyVote and thus the actual costs we will incur.'')
\704\ See proposed Rule 14a-2(b)(9)(ii)(2). One commenter
criticized the Commission for not giving proper consideration to
registrants' burden hours associated with the ``review and
feedback'' periods. See Glass Lewis I.
\705\ In the Proposing Release, for purposes of its PRA
analysis, the Commission assumed that, on average, one-third of the
5,690 registrants that filed proxy materials with the Commission
during calendar year 2018 (1,897) would be the subject of proxy
voting advice each year. See Proposing Release, note b. of PRA Table
1 at 66553. Some commenters who disagreed with this assumption
stated that this figure was too low. See letter from Glass Lewis I.
(suggesting that the correct number was ``likely much closer to 100%
of those that filed proxy materials with the Commission'') and
ProxyVote I (``The appropriate number of registrants that should be
subject to the Proposed Rulemaking's estimates should be 5,690
registrants, not 1,897 registrants''). We also note certain
statements from some proxy voting advice businesses indicating that
they cover tens of thousands of shareholder meetings annually across
global markets. See letters from Glass Lewis I and II; ISS; Egan-
Jones. Accordingly, we have reconsidered our original estimate of
one-third, and agree that our calculations should be based on the
larger number of 5,690 registrants, given the significant volume of
registrants and shareholder meetings that are the subject of proxy
voting advice each year. This results in a total annual burden
increase of 50 x 5,690 = 284,500 hours. We note that such burden
increase would be offset against any corresponding reduction in
burden resulting from the registrant forgoing other methods of
responding to the proxy voting advice (such as investor outreach)
the registrant determines are no longer necessary or are less
preferable in light of the new rules.
---------------------------------------------------------------------------
2. Aggregate Increase in Burden
Table 1 summarizes the calculations and assumptions used to derive
our estimates of the aggregate increase in burden for all affected
parties corresponding to the amendments.
PRA Table 1--Calculation of Aggregate Increase in Burden Hours Resulting From the Amendments
----------------------------------------------------------------------------------------------------------------
Affected parties
-----------------------------------------------------
Proxy voting advice
businesses Registrants
(A) (B)
----------------------------------------------------------------------------------------------------------------
Burden Hour Increase...................................... 52,640 284,500
----------------------------------------------------------------------------------------------------------------
Aggregate Increase in Burden Hours........................ [Column Total (A)] + [Column Total (B)] = [337,140]
----------------------------------------------------------------------------------------------------------------
3. Increase in Annual Responses
We believe that the amendments would increase the number of annual
responses \706\ to the existing collection of information for
Regulation 14A. Although we do not expect registrants 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 17 CFR 240.14a-6 may increase in proportion to the number of
times that registrants choose to provide a statement in response to a
proxy voting advice business's proxy voting advice as contemplated by
Rule 14a-2(b)(9)(ii)(B) and/or the safe harbor under Rule 14a-
2(b)(9)(iv). For purposes of this PRA, we estimate that there would be
an additional 783 annual responses to the collection of information as
a result of the amendments.\707\
---------------------------------------------------------------------------
\706\ For purposes of the Regulation 14A collection of
information, the number of annual responses corresponds to the
estimated number of new filings that will be made each year under
Regulation 14A, which includes filings such as DEF 14A; DEFA14A;
DEFM14A; and DEFC14A. When calculating PRA burden for any particular
collection of information, the total number of annual burden hours
estimated is divided by the total number of annual responses
estimated, which provides the average estimated annual burden per
response. The current inventory of approved collections of
information is maintained by the Office of Information and
Regulatory Affairs (OIRA), a division of OMB. The total annual
burden hours and number of responses associated with Regulation 14A,
as updated from time to time, can be found at https://www.reginfo.gov/public/do/PRAMain.
\707\ Because a registrant's decision to review and file
additional soliciting materials in response to proxy voting advice
will be entirely voluntary, it is difficult to predict how
frequently such parties will choose to do so. For purposes of the
PRA estimate in the Proposing Release, the Commission used as its
baseline the average number of times firms filed additional
definitive proxy materials in response to proxy voting advice over
the three calendar years 2016 (99), 2017 (77) and 2018 (84), or 87.
See Proposing Release at n. 269. For purposes of its PRA analysis,
the Commission estimated that at least three times as many
registrants would 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
had historically chosen to file additional soliciting materials. As
a result, the Commission estimated that three times as many
supplemental proxy filings would be made each year, which would
increase the annual responses to the Regulation 14A collection of
information by the same amount. For purposes of this PRA analysis,
we apply a similar methodology. To the extent that registrants
believe that the efficacy of providing a response to proxy voting
advice via additional soliciting materials will be enhanced by the
amendments, and make registrants more likely to use this mechanism
than they have in the past, we expect that the number of annual
responses to the Regulation 14 collection of information will
increase correspondingly. However, it is difficult to reliably
predict what this overall increase would be. In light of comments we
received that, as a general matter, our PRA estimates were too low,
we think it is appropriate to increase our estimate of additional
soliciting materials filed each year from three times the current
number to ten times the current number. Taking the average of the
Rule 14a-6 filings made in years 2016, 2017, 2018 (87), we multiply
by ten for an estimate of 870 Rule 14a-6 filings, or an increase of
783 annual responses to the Regulation 14A collection of
information.
---------------------------------------------------------------------------
4. Incremental Change in Compliance Burden for Collection of
Information
Table 2 below illustrates the incremental change to the total
annual compliance burden for the Regulation 14A collection of
information in hours and in costs \708\ as a result of the amendments.
The table sets forth the percentage estimates we typically use for the
burden allocation for each response.
---------------------------------------------------------------------------
\708\ 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.
[[Page 55151]]
PRA Table 2--Calculation of Increase in Burden Hours Resulting From the Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increase in Increase in Increase in
Number of estimated responses Total increase burden hours Increase in professional professional
in burden hours per response internal hours hours costs
(A) [dagger] (B) (C) = ((D) = (B) x (E) = (B) x (F) = (E) x
[dagger][dagger 0.75 0.25 $400
]
--------------------------------------------------------------------------------------------------------------------------------------------------------
6,369.............................................................. 337,140 [dagger][dagger 252,855 84,285 $33,714,000
][dagger] 50
--------------------------------------------------------------------------------------------------------------------------------------------------------
[dagger] This number reflects an estimated increase of 783 annual responses to the existing Regulation 14A collection of information. See supra note
707. 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 (52,640 hours) and registrants (284,500
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.
5. Program Change and Revised Burden Estimates
Table 3 summarizes the estimated change to the total annual
compliance burden of the Regulation 14A collection of information, in
hours and in costs, as a result of the amendments.
PRA Table 3--Requested Paperwork Burden Under the Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Revised burden
-----------------------------------------------------------------------------------------------------------------------------------------------
Current Current Increase in Increase in
annual burden Current cost Increase in 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 $73,480,012 783 252,855 $33,714,000 6,369 803,956 $107,194,012
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
See Column (A) in PRA Table 2 noting an estimated increase of 783 annual responses to the existing Regulation 14A collection of information.
See Column (D) in PRA Table 2.
From Column (F) in PRA Table 2.
VI. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with the Regulatory Flexibility Act
(``RFA'').\709\ It relates to the amendments to: The definition of
``solicitation'' in Rule 14a-1(l); the proxy solicitation exemptions in
Rule 14a-2(b); and the prohibition on false or misleading statements in
solicitations in Rule 14a-9 of Regulation 14A under the Exchange Act.
An Initial Regulatory Flexibility Analysis (``IRFA'') was prepared in
accordance with the RFA and was included in the Proposing Release.
---------------------------------------------------------------------------
\709\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
A. Need for, and Objectives of, the Final Amendments
Given the importance of a properly functioning proxy system to
investors and the capital markets, the purpose of the amendments is to
help ensure that investors, or those acting on their behalf, who use
proxy voting advice have access to more transparent and complete
information with which to make their voting decisions, while not
imposing undue costs or delays that could adversely affect the timely
provision of proxy voting advice, with the ultimate aim of facilitating
informed voting decisions. The need for, and objectives of, these
amendments are discussed in more detail in Sections I, II, and IV
above.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on any aspect of the
IRFA, including how the proposed amendments could achieve their
objective while lowering the burden on small entities, the number of
small entities that would 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. We also requested comment on the
number of proxy voting advice businesses that would be small entities
subject to the proposed amendments.
We did not receive estimates from commenters on the number of small
entities that would be affected by the proposed amendments or the
number of proxy voting advice businesses that would be small entities
subject to the proposed amendments. However, several commenters
asserted that the Commission's economic analysis failed to consider the
cost and effect of the proposed amendments on smaller proxy voting
advice businesses.\710\ One such commenter stated that the proposals
would be particularly burdensome for small proxy voting advice
businesses.\711\ Another commenter, who identified itself as a small
entity (with under $5 million in assets) providing proxy voting
services to institutional investor clients, asserted that small
entities like itself would face significant resource and capacity
burdens when complying with the proposed amendments, with no gain in
the quality of voting or results for their clients.\712\ In addition,
one commenter believed that small and medium-sized investment advisers
would be disproportionately affected by increased costs that may result
from the proposed amendments because they are less likely to be able to
have staff solely dedicated to the proxy voting process,\713\ while
another predicted that delays and increased costs resulting from the
proposed amendments would most heavily impact smaller institutional
investors, such as churches, endowments, unions, pension funds,
etc.\714\ Several commenters stated that small entities may not have
sufficient staffing and resources to
[[Page 55152]]
comply with the review and feedback process, and therefore should
either be exempted from the proposals or, at a minimum, be given an
extended timeframe for compliance.\715\ In developing the FRFA, we
considered these comments as well as comments on the proposed
amendments generally.\716\ As discussed throughout this release,
including in Section VI.D below, we note that the shift to a
principles-based approach for the final amendment should help alleviate
a number of the concerns raised by commenters about the potential
impact on small entities.
---------------------------------------------------------------------------
\710\ See, e.g., letters from Felician Sisters II; Good
Shepherd; IASJ; Interfaith Center II; St. Dominic of Caldwell.
\711\ See letter from Interfaith Center II.
\712\ See supra note 518.
\713\ See letter from IAA.
\714\ See letter from J. McRitchie I.
\715\ See letters from Felician Sisters II; Good Shepherd; IASJ;
Interfaith Center II; St. Dominic of Caldwell.
\716\ See supra Sections II; IV.
---------------------------------------------------------------------------
C. Small Entities Subject to the Final Amendments
The amendments could affect some small entities; specifically,
those small entities that are: (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)(1)(iii), as
amended); and (ii) registrants conducting solicitations covered by
proxy voting advice. Although not directly subject to the amendments,
clients of proxy voting advice businesses and the investors on whose
behalf such clients vote proxies may be indirectly affected by the
amendments to the extent that the costs borne by the proxy voting
advice businesses result in increased fees for such services.
The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental jurisdiction.'' \717\
The definition of ``small entity'' does not include individuals. 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.\718\
An investment company, including a business development company,\719\
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.\720\ 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.\721\
---------------------------------------------------------------------------
\717\ 5 U.S.C. 601(6).
\718\ See Exchange Act Rule 0-10(a) [17 CFR 240.0-10(a)].
\719\ 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); 80a-53-64].
\720\ See Investment Company Act Rule 0-10(a) [17 CFR 270.0-
10(a)].
\721\ See Advisers Act Rule 0-7(a) [17 CFR 275.0-7(a)].
---------------------------------------------------------------------------
As discussed in Section IV.B.1, we are not aware of smaller
entities that currently supply research, analysis, and recommendations
to support the voting decisions of their clients that would fall within
the definition of ``solicitation'' and would therefore be directly
affected by the amendments.\722\ As far as registrants that may be
directly affected, we estimate that there are 1,011 issuers that file
with the Commission, other than investment companies and investment
advisers, that may be considered small entities.\723\ In addition, we
estimate that, as of December 31, 2019, there were 92 registered
investment companies that may be considered small entities.\724\
Finally, we estimate that, as of December 31, 2019, there were 452
investment advisers that may be considered small entities and may be
indirectly affected by the amendments.\725\
---------------------------------------------------------------------------
\722\ In this regard, commenters did not provide data that would
allow us to ascertain the extent to which there are smaller entities
that would be considered proxy voting advice businesses within the
scope of the amendments.
\723\ This estimate is based on staff analysis of issuers,
excluding co-registrants, with EDGAR filings of either Form 10-K or
amendments, filed during the calendar year of January 1, 2019 to
December 31, 2019. The data used for this analysis were derived from
XBRL filings, Compustat, and Ives Group Audit Analytics.
\724\ 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 period ending December 2019.
\725\ Based on SEC-registered investment adviser responses to
Items 5.F. and 12 of Form ADV. As discussed above, ISS, one of the
three major firms that comprise the proxy advisory industry in the
U.S., is also registered investment advisor. See supra Section
IV.B.1.a.
---------------------------------------------------------------------------
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
We anticipate that any costs resulting from the amendments will
primarily relate to Rule 14a-2(b)(9) and, as such, predominantly affect
the proxy advice voting businesses that will 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).\726\ These businesses, including any affected small
entities, will likely incur costs to ensure that their internal
practices, procedures, and systems are sufficient to meet the conflicts
of interest disclosure and notice requirements under Rule 14a-2(b)(9).
As noted above, we are not aware of smaller entities that currently
provide services that would cause them to be subject to the proposed
amendments; nevertheless, in the interest of completeness, we have
considered the potential effects of the amendments on smaller proxy
voting advice businesses throughout this FRFA. Registrants of all sizes
also could incur costs associated with coordinating with proxy voting
advice businesses to receive the proxy voting advice, reviewing the
proxy voting advice, and determining whether to prepare and file
additional soliciting materials in response to the proxy voting
advice.\727\ Compliance with the amendments may require the use of
professional skills, including legal skills.
---------------------------------------------------------------------------
\726\ The amendments are discussed in detail in Section II,
above. We discuss the economic impact, including the estimated costs
and benefits, of the amendments to all affected entities, including
small entities, in Section IV above.
\727\ See supra Section V.C.1.b. We do not expect that the
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. See supra note
685.
---------------------------------------------------------------------------
The amendments 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 amendments will be similar
for large and small entities. Accordingly, we refer to the discussion
of the amendments' economic effects on all affected parties, including
small entities, in Section IV above.\728\ Consistent with that
discussion, to the extent that any small entities currently or in the
future may provide proxy voting advice, we anticipate that the economic
benefits and costs likely will vary widely among such entities based on
a number of factors, including the nature and conduct of their
businesses, as well as the extent to which they are already meeting or
exceeding the requirements established by the amendments, which makes
it difficult to project the
[[Page 55153]]
economic impact on small entities with precision.\729\
---------------------------------------------------------------------------
\728\ In particular, we discuss the estimated benefits and costs
of the amendments on all affected parties, including larger and
smaller entities, in Section IV.C. above. We also discuss the
estimated compliance burden associated with the amendments for
purposes of the PRA in Section V above.
\729\ See supra Section IV.C.5.
---------------------------------------------------------------------------
As a general matter, however, we recognize that any costs of the
amendments borne by the affected entities, such as those related to
compliance with the amendments, or the implementation or restructuring
of internal systems needed to adjust to the amendments, could have a
proportionally greater effect on small entities, as they may be less
able than larger entities to bear such costs. Further, as discussed in
Section IV.B.1.a., the three major proxy voting advice businesses
currently operating in the U.S. 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 voting recommendation
to clients. If competing proxy voting advice businesses do not have
such processes in place, they could be disproportionately affected by
the amendments. Finally, the amendments may impact competition, in
particular for any small entities that provide proxy voting advice
services. To the extent that a proxy voting advice business's existing
practices and procedures do not satisfy the conditions of Rule 14a-
2(b)(9), such entities, including any affected small entities, will
incur additional compliance costs and, consequently, may be more likely
to exit the market for such services or less able to enter the market
in the first place.
We believe that the principles-based approach we are adopting
should address many of the concerns commenters raised about the
proposed amendments' potential disparate effect on smaller firms. By
providing proxy voting advice businesses, including those that are
small entities, with the flexibility to design policies and procedures
that are scaled to the scope of their business operations, we believe
these entities will be able to find the most cost-effective means to
comply with the requirements.
With respect to costs that may be incurred by registrants as a
result of the amendments, these costs will vary depending upon the
particular facts and circumstances of the proxy voting advice as well
as the resources of the registrant. Consequently, as with proxy voting
advice businesses, it is difficult to quantify these costs with
precision, particularly since the degree to which a registrant elects
to review and respond to proxy voting advice is entirely
voluntary.\730\ As a function of their smaller size, registrants that
are small entities may incur proportionally greater costs associated
with amendments than larger entities, but the extent of such costs is
uncertain. Importantly, while registrants of all sizes may take
advantage of the ability to review proxy voting advice provided
pursuant to the amendments and potentially file additional soliciting
material in response, they are not required to do so; as a result, we
expect that registrants would engage in the process only to the extent
that they anticipate the benefits of such review to be greater than the
costs.
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\730\ For purposes of the PRA analysis in Section V, we estimate
an annual increase of 50 burden hours per registrant in connection
with the amendments.
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E. Agency Action To Minimize Effect on Small Entities
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 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 the
amendments would accomplish the objectives of this rulemaking. The
amendments are intended to improve the completeness and transparency of
information available to shareholders and those acting on their behalf
when making voting decisions and enhance the overall functioning of the
proxy voting process, in furtherance of Section 14 of the Exchange Act.
These objectives 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 solicitation exemptions in Rules
14a-2(b)(1) or (b)(3).\731\ For similar reasons, we do not believe that
exempting smaller proxy voting advice businesses from all or part of
the amendments would accomplish our objectives.\732\
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\731\ Moreover, because the amendments reflect a principles-
based, rather than a more prescriptive, framework, there is no
practicable way to establish different compliance requirements for
smaller proxy voting advice businesses without also compromising the
principles-based nature of the requirements. Under the rules that we
are adopting, proxy voting advice businesses may comply in whatever
manner they choose so long as they satisfy the principles set forth.
\732\ See supra Section IV.E.6. Exempting smaller proxy voting
advice businesses from the additional conditions of Rules 14a-
2(b)(1) and (3) would reduce the resulting costs of the 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 if they chose to avail themselves of such
an exemption.
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In a change from the proposal, the amendments generally use
performance standards rather than design standards. Based on commenter
feedback, including that related to the potential impact on smaller
entities, we believe that moving from an approach that emphasizes
design standards to one that emphasizes performance standards will
provide all entities, and in particular smaller entities, with
sufficient flexibility to find the most cost-effective means of
compliance while still achieving our objectives. We recognize that
using performance standards rather than design standards may increase
the degree of uncertainty that proxy voting advice businesses and their
clients have regarding whether such businesses are in full compliance
with the rules. However, we also are adopting certain safe harbors that
we believe will help mitigate such uncertainty to the extent proxy
voting advice businesses choose to rely on them.
In adopting 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.
VII. Statutory Authority
We are adopting 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.
In accordance with the foregoing, we are amending title 17, chapter
II, of the Code of Federal Regulations as follows:
[[Page 55154]]
PART 240--GENERAL RULES AND REGULATIONS UNDER THE SECURITIES
EXCHANGE ACT OF 1934
0
1. The authority citation for part 240 continues to read, in part, 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:
0
a. Revising paragraph (l)(1)(iii);
0
b. In paragraph (l)(2)(iii), removing the word ``or'' from the end of
the paragraph;
0
c. In paragraph (l)(2)(iv)(C), removing at the end of the paragraph
``.'' and adding in its place ``; or'';
0
d. Adding paragraph (l)(2)(v).
The revisions and additions 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 adding paragraph (b)(9) to read as follows:
Sec. 240.14a-2 Solicitations to which Sec. 240.14a-3 to Sec.
240.14a-15 apply.
* * * * *
(b) * * *
(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 both
of the conditions in (b)(9)(i) and (ii) of this section are satisfied:
(i) The proxy voting advice business includes in its proxy voting
advice or in an electronic medium used to deliver the proxy voting
advice prominent disclosure of:
(A) Any information regarding an 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
(B) 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; and
(ii) The proxy voting advice business has adopted and publicly
disclosed written policies and procedures reasonably designed to ensure
that:
(A) Registrants that are the subject of the proxy voting advice
have such advice made available to them at or prior to the time when
such advice is disseminated to the proxy voting advice business's
clients; and
(B) The proxy voting advice business provides its clients with a
mechanism by which they can reasonably be expected to become aware of
any written statements regarding its proxy voting advice by registrants
who are the subject of such advice, in a timely manner before the
security holder meeting (or, if no meeting, before the votes, consents,
or authorizations may be used to effect the proposed action).
Note 1 to paragraph (b)(9)(ii): For purposes of satisfying the
requirement in paragraph (b)(9)(ii)(A) of this section, the proxy
voting advice business's written policies and procedures need not
require it to make available to the registrant additional versions
of its proxy voting advice with respect to the same meeting, vote,
consent or authorization, as applicable, if the advice is
subsequently revised.
(iii) A proxy voting advice business will be deemed to satisfy the
requirement in paragraph (b)(9)(ii)(A) of this section if it has
written policies and procedures that are reasonably designed to provide
a registrant with a copy of its proxy voting advice, at no charge, no
later than the time such advice is disseminated to the proxy voting
advice business's clients. Such policies and procedures may include
conditions requiring that:
(A) The registrant has filed its definitive proxy statement at
least 40 calendar days before the security holder meeting date (or if
no meeting is held, at least 40 calendar days before the date the
votes, consents, or authorizations may be used to effect the proposed
action); and
(B) The registrant has acknowledged that it will only use the copy
of the proxy voting advice for its internal purposes and/or in
connection with the solicitation and such copy will not be published or
otherwise shared except with the registrant's employees or advisers.
(iv) A proxy voting advice business will be deemed to satisfy the
requirement in paragraph (b)(9)(ii)(B) of this section if it has
written policies and procedures that are reasonably designed to inform
clients who receive proxy voting advice when a registrant that is the
subject of such advice notifies the proxy voting advice business that
it intends to file or has filed additional soliciting materials with
the Commission pursuant to Sec. 240.14a-6 setting forth the
registrant's statement regarding the advice, by:
(A) The proxy voting advice business providing notice to its
clients on its electronic platform that the registrant intends to file
or has filed such additional soliciting materials and including an
active hyperlink to those materials on EDGAR when available; or
(B) The proxy voting advice business providing notice to its
clients through email or other electronic means that the registrant
intends to file or has filed such additional soliciting materials and
including an active hyperlink to those materials on EDGAR when
available.
(v) Paragraph (b)(9)(ii) of this section does not apply to proxy
voting advice to the extent such advice is based on custom voting
policies that are proprietary to a proxy voting advice business's
client.
(vi) Paragraph (b)(9)(ii) of this section does not apply to any
portion of the proxy voting advice that makes a recommendation to a
security holder as to its vote, consent, or authorization in a
solicitation subject to Sec. 240.14a-3(a):
[[Page 55155]]
(A) To approve any transaction specified in Sec. 230.145(a); or
(B) By any person or group of persons for the purpose of opposing a
solicitation subject to this regulation by any other person or group of
persons.
* * * * *
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 advice business's methodology, sources of information,
or conflicts of interest.
* * * * *
By the Commission.
Dated: July 22, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-16337 Filed 9-1-20; 8:45 am]
BILLING CODE 8011-01-P