SEC pauses proxy voting rule enforcement amid review

In July 2020, the SEC adopted requirements that proxy voting advice by proxy advisory firms, in order to rely on exemptions from the information and filing requirements of the proxy rules, must provide clients with tailored and comprehensive disclosure about their conflicts of interest. Firms also must establish policies and procedures designed to ensure companies that are the subject of their voting advice are able to see and respond to such guidance in a timely manner.

The Commission in 2019 underscored its view that proxy voting advice generally constitutes a solicitation under the proxy rules. So, the failure to disclose material information about proxy voting advice may constitute a potential violation of the anti-fraud provision of the proxy rules.

In his statement, Gensler said staff “should consider whether to recommend that the Commission revisit its 2020 codification of the definition of ‘solicitation’ as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.”

In response, the SEC’s Division of Corporation Finance stated it “will not recommend enforcement action to the Commission … during the period in which the Commission is considering further regulatory action in this area.”

The effective compliance date for the July 2020 amendments is currently Dec. 1, 2021.

Praise and disagreement

Institutional Shareholder Services (ISS) initiated a lawsuit against the SEC in 2019 contending that guidance on proxy voting the agency had put forward in August of that year represented abuse of power.

In response to Tuesday’s announcement, ISS President and CEO Gary Retelny said in a statement: “We welcome the SEC’s announced decision to consider revisiting its proxy adviser rulemaking, which we believe was ill-conceived, inconsistent with the law, and pushed through under the previous administration against the wishes of investors the agency is meant to protect. We look forward to participating in the upcoming rulemaking process and encourage all good governance supporters to do the same.”

Republican SEC Commissioners Hester Peirce and Elad Roisman expressed their gripes with Tuesday’s move in a joint statement: “We are open to seeing what, if any, changes to our rules the staff recommends and to working with our colleagues to consider such recommendations. We find it difficult, however, to imagine what has changed in the roughly 10 months since the Commission last considered this issue that would call into question such recently adopted requirements.”

“Indeed, the compliance date for the exemption conditions is still months away, which makes it challenging, if not impossible, for us to know how these requirements will work in practice,” Peirce and Roisman added. “How can we evaluate the appropriateness of further changes without considering such new data or experience? We find it even harder to understand how the Commission would justify a departure from its longstanding legal interpretation about proxy solicitation.”