Securities Industry Commentator by Bill Singer Esq

Federal Court Orders Florida Man and Foreign Defendants to Pay $7 Million for Role in Fraudulent Binary Options and Digital Asset Scheme (CFTC Release)

West Linn Man Sentenced to Federal Prison for Role in Real Estate, Agriculture, and Mining Investment Schemes (DOJ Release)

SEC Adopts New Rules for Universal Proxy Cards in Contested Director Elections / New Rules Allow Shareholders to Vote for their Preferred Mix of Board Candidates in Contested Elections (SEC Release)

Statement on Universal Proxy by SEC Commissioner Caroline A. Crenshaw

Statement on Universal Proxy Ballots by SEC Commissioner Allison Herren Lee

Dissenting Statement on Universal Proxy by SEC Commissioner Hester M. Peirce

Statement on Universal Proxy Rules by SEC Commissioner Elad L. Roisman

SEC Proposes Rule Amendments to Proxy Rules Governing Proxy Voting Advice / Proposed Rules Would Address Concerns by Investors and Others that the Current Rules May Impede and Impair the Timeliness and Independence of Proxy Voting Advice (SEC Release)

Statement on Proxy Voting Advice by SEC Commissioner Caroline A. Crenshaw

Statement on Proposed Amendments Related to Proxy Voting Advice by SEC Commissioner Allison Herren Lee

Dissenting Statement on Proxy Voting Advice Proposal by SEC Commissioner Hester M. Peirce

Too Important to Regulate? Rolling Back Investor Protections on Proxy Voting Advice by SEC Commissioner Elad L. Roisman

The Ex-Wife, the Ex-Husband Stockbroker, the Two FINRA Arbitrations, the Stale Case, the Default Case, and the Appeal (BrokeAndBroker.com Blog)

Two of Three FINRA Arbitrators Ironically Disappear In Unexplained Expungement Award (BrokeAndBroker.com Blog)

DreamFunded Dream Faded At FINRA And SEC Declines to Stay Expulsions and Bars (BrokeAndBroker.com Blog)

The orders find that Fingerhut, Barak and Valariola created, disseminated and/or facilitated the use of fraudulent solicitations in emails, websites, and video sales letters promising free access to purportedly successful automated trading systems that traded on behalf of clients in binary options involving commodity interests and digital assets. These solicitations misrepresented hypothetical and fictitious trading results as real results, and used fabricated customer testimonials.

The order against Fingerhut also finds that he knowingly made false statements to the CFTC in connection with the investigation into his role in the fraud. 

The orders require Fingerhut to pay $400,011 in disgorgement and a $600,000 civil monetary penalty, and Barak, Valariola and DPL to pay $3 million in disgorgement and a $3 million civil monetary penalty.

The CFTC continues to litigate this matter against two additional entity defendants and one relief defendant. 

[B]eginning in 2013, in Oregon and elsewhere, Shelofsky knowingly and intentionally devised several different investment fraud schemes. Shelofsky falsely told prospective investors and lenders that he had successful real estate development projects in Bend, Oregon and West Linn and a successful hemp seed cultivation and distribution venture in West Linn. During the same time period, Shelofsky and two other individuals formed a precious metals mining operation that purportedly used a proprietary mining technique to extract precious metals from the sand tailings of other mining operations. While the group made minimal efforts to operate the venture, Shelofsky misled several investors about the status of the operation to fraudulently obtain funds.

Shelofsky made repeated and deliberate misrepresentations and false promises about the status and success of his various ventures, the purported returns investors would receive, and the existence of collateral pieces of real estate supposedly backing investments. Shelofsky employed the services of others to further his schemes and establish his credibility, including a lawyer to create legal documents and an assistant to open bank accounts in the names of several limited liability corporations. Shelofsky used investor funds for personal expenses and to support his own high standard of living. Dozens of individual investors and lenders lost millions of dollars as a result of Shelofsky's schemes.

The final rules will require dissident shareholders and registrants to provide shareholders with a proxy card that includes the names of all registrant and dissident nominees. The rules will apply to all non-exempt solicitations for contested elections other than those involving registered investment companies and business development companies. The rules will require registrants and dissidents to provide each other with notice of the names of their nominees, establish a filing deadline and a minimum solicitation requirement for dissidents, and prescribe presentation and formatting requirements for universal proxy cards.

To further facilitate shareholder voting in director elections, the Commission also voted to adopt amendments to the proxy rules to ensure that proxy cards clearly specify the applicable shareholder voting options in all director elections and to require proxy statements to disclose the effect of a shareholder's election to withhold its vote.

Congratulations to the rulemaking team from the Division of Corporation Finance, as well as the staff within the Division of Economic and Risk Analysis and the Office of the General Counsel. This rulemaking has been several years in the making,[1] and I am glad that we are here today to finalize it.

The reality of modern board of director elections is that few shareholders attend a corporation's annual meeting in-person to vote.[2] The ramifications of this are meaningful. Proxy voters in contested Board of Directors elections are usually unable to choose a mix of dissident and management nominees.[3] By contrast, those who vote in person, can.

The amendments before us serve a simple and important purpose: to ensure that shareholders can, by proxy, cast votes for a mix of management's slate of director candidates and a dissident's slate of director candidates in contested elections. Just as any shareholder who casts their vote in-person at the shareholder's annual meeting is able to do.

In some contexts, uniformity can bring about fairness and efficiency. And today's rule achieves that by mandating the use of universal proxy cards.[4] This change has been supported by a broad swath of investors and market participants, and is informed by the work of the SEC's Investor Advisory Committee.[5] Thank you to all of those that have helped advocate for this much needed and common-sense improvement to shareholder democracy.

And thank you again to the staff who have worked on this rulemaking over the years, to the team who brought this across the finish line, and to Corey Klemmer in Chair Gensler's office.

= = =

 

[1] See Universal Proxy, Release No. 34-79164 (proposed Oct. 26, 2016). Further, the impediment that today's adopting release addresses has been noted for decades. See Recommendations of the Investor Advisory Committee (IAC) Regarding SEC Rulemaking to Explore Universal Proxy Ballots (July 25, 2013) (recommending that the Commission should relax the "bona fide nominee" rule so that proxy contestants can use universal proxy cards); Mary L. Schapiro, Commissioner, Sec. & Exch. Comm'n, Remarks Before the National Investor Relations Institute's Fall Conference (Nov. 6, 1992) (noting that in adopting the bona fide nominee rule, "[t]he Commission chose a partial solution to the problem, opting not for the most simple approach that would permit the inclusion of some management nominees on the dissident's proxy").

[2] State statutes require corporations to hold these annual meetings for the purpose of electing directors. See Universal Proxy, Release No. [] at 6 (adopted Nov. 17. 2021) [hereinafter Adopting Release].

[3] Due to state laws, when a proxy voter submits more than one proxy voting card, only the most recently submitted card is counted and the earlier-dated card is invalidated. See Adopting Release at 8-9. Federal law provides that, in an election contest, one party cannot include the other party's nominees on its proxy card with the consent of that nominee, and such consent is rarely provided. See id. Thus, investors voting by proxy have to cast their vote on one party's proxy card and cannot mix and match candidates form different proxy cards. See id.

[4] See id at 10-11.

[5] See Recommendation of the Investor Advisory Committee (IAC): Proxy Plumbing (Sept. 5, 2019).

Electing corporate directors is perhaps the most critical function of shareholders in our system of corporate democracy. Corporations are owned by shareholders, but managed and overseen by boards of directors. Thus, it is the shareholders - the owners - that decide whom to entrust to oversee their capital. This is the integral construct of American corporations. The amendments the Commission is voting on today will help ensure that shareholders voting by proxy can freely choose between and among all qualified candidates for the board - and are not limited to choosing the entire slate put forth by one side or the other.

These changes are long overdue,[1] are supported by a broad and diverse coalition of market participants and commenters,[2] and will help modernize the proxy voting rules to promote fairness.

Because most shareholders vote by proxy,[3] it is critically important that the proxy voting process, to the extent possible, replicate the experience of voting in person at an annual meeting.[4] With respect to contested director elections, however, there is a significant asymmetry between in-person and proxy voting. Specifically, shareholders voting in person may choose from all director nominees and vote for the combination of directors they think will best promote effective corporate governance and protect their interests. In other words, they can mix and match from both registrant and dissident slates of nominees. Shareholders voting by proxy, however, generally must choose between voting for either the nominees presented on the registrant's proxy card or the nominees presented on the dissident's proxy card.[5] In other words, they do not have the flexibility afforded in-person voters to choose the best combination of candidates from among all nominees.

Today's amendments will eliminate this asymmetry by requiring the use of a universal proxy card that will allow shareholders to vote by proxy in the same manner as is allowed for in-person voting, as well as implementing a number of related changes.[6] This common-sense, long-advocated change has broad and diverse support, including from the SEC's Investor Advisory Committee, the Universal Proxy Working Group, an informal working group with a wide range of participants, and many others.[7] Indeed there was broad support among commenters on both the original proposal in 2016, and the re-opening release this year, in favor of adopting these changes. To the extent there was a noteworthy area of concern, it was the requirement that a dissident solicit shareholders representing only a simple majority of voting power in order for their candidates to be included on the universal ballot.[8] To address these comments and ensure that dissidents engage in meaningful solicitation efforts, the final rules raise the minimum solicitation requirement for dissidents to 67 percent.

The result is a carefully and thoughtfully crafted package of rules that will help ensure parity for shareholders voting by proxy and promote a more effective and fair proxy voting system. I want to thank the staff for their diligent and thorough work on this rulemaking. I'm pleased to vote in support of the universal proxy amendments.

 = = =

[1] As long ago as 2013, the SEC's Investor Advisory Committee recommended rule changes to facilitate the use of the universal proxy ballot. See Recommendations of the Investor Advisory Committee Regarding SEC Rulemaking to Explore Universal Proxy Ballots (July 25, 2013); see also Universal Proxy, Final Rule, Release No. [], 9 (Nov 17, 2021) ("For years, shareholders and their advocates have expressed concerns arising from being unable to choose a mix of dissident and registrant nominees when voting by proxy, and support for universal proxy has grown over time.") [hereinafter Adopting Release].

[2] For example, the proposal was supported by the SEC's Investor Advisory Committee. See Recommendation of the Investor Advisory Committee on Proxy Plumbing (Sept. 5, 2019). It was also supported by the Universal Proxy Working Group, an informal working group that includes representatives from Wachtell, Lipton, Rosen & Katz, Council of Institutional Investors, Investment Company Institute, Broadridge, JPMorgan Chase & Co., and others. See Letter from the Universal Proxy Working Group (Aug. 6, 2020).  

[3] See Adopting Release at 6 ("Today, few shareholders of public companies with a class of securities registered under the Exchange Act attend a registrant's meeting to vote in person. Instead, the primary means for shareholders to become informed about matters to be decided on at a meeting and to vote on the election of directors and other matters is through the proxy process.").

[4] See SEC Votes to Propose Rule Amendments to Facilitate Rights of Shareholders to Nominate Directors, Release No. 2009-116 (May 20, 2009) ("Congress gave the Commission authority over the corporate proxy process as a means of ensuring that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders. Refining the proxy process so that it replicates, as nearly as possible, the annual meeting is particularly important given that the proxy process has become the primary way for shareholders to know about the matters to be decided by the shareholder and to make their views known to company management.").

[5] In theory, one party may include another party's nominees on its proxy card with the consent of the nominees. However, because such consent is "rarely provided," in practice, shareholders must choose between the registrant's or dissident's proxy card. See Adopting Release at 8-9.  

[6] Specifically, the final rules require the use of a universal proxy card for all non-exempt solicitations involving director election contests, except those involving registered investment companies and business development companies. They also include other changes to facilitate the use of the universal proxy card such as certain notice, minimum solicitation, filing, formatting, and presentation requirements. See Adopting Release at 1.

[7] In addition to the Investor Advisory Committee and Universal Proxy Working Group, the comment file reflects support for mandating universal proxy from the American Business Conference, Council of Institutional Investors, Better Markets, Investment Company Institute, SIFMA, Principles for Responsible Investment, California Public Employees' Retirement System, and Sidley Austin LLP, among many others. See Comments on Proposed Rule: Universal Proxy.

[8] See Adopting Release at 35 ("Initially, there was significant support for the majority minimum solicitation requirement proposed. When the comment period was reopened in 2021, however, most commenters who addressed the issue favored an increased minimum solicitation requirement.").

I support universal proxy, but not today's version of universal proxy. 

Shareholders voting by proxy should be able to split their vote among company and dissident nominees.  Allowing shareholders a straightforward way of choosing a mixed slate through a universal proxy card can facilitate sensible changes to board composition.  Universal proxy makes sense for both operating companies and investment companies.  This particular universal proxy rule, however, may facilitate changes to the company that advance special interests rather than enhancing corporate value by serving as a tool for frivolous, as well as serious, activists.  I might have been able to support the rule if I felt we had explored thoroughly the potential that the rule could afford activists without a demonstrated commitment to the company an opportunity to meddle in the company's affairs.  I do not believe we have done this work so I cannot support the rule.

The price of entry onto the company's proxy card under this rule is low.  Aside from requiring the dissident to list the company's nominees on its proxy card and satisfy notice and filing requirements, the rule's only gating requirement is that the dissident state an intention to solicit 67 percent of the voting power of the shares entitled to vote at the meeting and alert the company if its intentions change.  While a 67 percent threshold is an improvement from the 50 percent threshold in the proposal, even the new threshold is easy to meet or ignore.  Indeed, most dissidents already meet it.[1]  Moreover, because the rule focuses on voting power rather than shareholder accounts, dissidents will often be able to meet the threshold by soliciting a small number of institutional shareholders, while ignoring small shareholders.  The solicitation of large shareholders is not very burdensome given that the rule permits the use of notice-and-access solicitation; sending a postcard with a website link to proxy materials will suffice.  The rule also lacks a clear enforcement mechanism for a dissident that fails to carry through on its solicitation intentions. 

The rule does not condition access to the company's proxy card on a demonstrated commitment to the company.  Any non-shareholder looking to further any cause can buy a share just before putting up a director candidate.  Doing so will get her the leverage she needs to enter the negotiating room with management.  In that back room, she can elicit from the company a measure to further her cause.  Those negotiations not only will distract managers from important company business, but could result in changes that do not benefit the company.  Consider, for example, a light-hearted "gadbee" example: a passionate, wealthy, and sophisticated bee advocate-full disclosure, I am a big honey bee supporter-who is not a company shareholder.  She might buy a few shares of several companies, put up a credible director candidate in compliance with each company's advance notice bylaw provision, and then negotiate with companies not enthusiastic about having this candidate on the proxy card and potentially on the board.  She might elicit from those companies a promise to put beehives on the roof of each office building.  A small ask for a noble purpose, but a needless distraction nonetheless for the company.  Making matters worse, the activist-manager negotiations will happen outside of the view of other shareholders.  Indeed, any non-shareholder activist need not buy any shares to execute her strategy; she need only dangle the possibility of buying a few shares and putting forward directors to scare management into the negotiating room.

Contrast such an opportunistic shareholder with a long-time or large shareholder who has a serious plan for improving the way a company is managed.  Under today's release, both the activist, indifferent to the company's future, and the activist, committed to the company's future, will have equal access to the company's proxy card and to the negotiating leverage that comes with such access.  While I hope that today's rule improves the mechanics of proxy voting in contests in the latter context, I expect then that we will see more contested elections or threats thereof after the rule goes into effect. 

A couple alternative approaches to today's rule might have worked better.  For example, access to the company proxy card could have been reserved for shareholders who satisfied certain ownership requirements.  We could have looked to analogues in Rule 14a-8, our shareholder proposal rule, and our now defunct proxy access rule, as one commenter suggested.[2]  Any requirement to hold a particular amount of a company's shares for a particular minimum holding period would have to be designed to ensure that any shareholder with a demonstrated commitment to a company's long-term value could put forward directors for inclusion on the company's proxy card.  So a requirement for a shareholder to hold at least three percent for three years, such as required in the non-operational proxy access rule, likely would be far too high.  At the same time, any such requirement would need to preclude activists without an interest in the company's value from using the possibility of putting their director candidates on the company's proxy card as a way to force changes potentially inimical to the company's value.  So a requirement to hold $2,000 worth of shares for three years, as required by Rule 14a-8, likely would be far too low.  Alternatively, the rule, as another commenter suggested, could have allowed companies to opt out of the universal proxy regime if shareholders decided it would facilitate unwanted activism.[3]  Such an opt-out would leave an escape valve for companies if the rule turned out to facilitate harmful activism.  Finally, the rule could have required dissidents to solicit a majority of all shareholder accounts, as one commenter suggested.[4]

Thank you to the staff for your work on this release.  I appreciated the time you spent with me discussing my concerns.  While I ultimately decided that the costs the rule may impose on shareholders could outweigh the benefits, I found your reasons for believing otherwise compelling.  I hope that when we do a retrospective review of this rulemaking, we find that you are right and I am wrong. 

= = =

 

[1] See Universal Proxy Adopting Release at note 258 and accompanying text. 

[2] See Letter from Attorneys with Sidley Austin LLP (June 7, 2021), https://www.sec.gov/comments/s7-24-16/s72416-8893550-241161.pdf. 

[3] See Letter from Scott Hirst, Associate Professor of Law, Boston University School of Law (June 7, 2021), https://www.sec.gov/comments/s7-24-16/s72416-8893542-241143.pdf.

[4] See Letter from Richard B. Zabel, General Counsel and Chief Legal Officer, Elliott Investment Management L.P. (June 4, 2021), https://www.sec.gov/comments/s7-24-16/s72416-8883055-240420.pdf.

Good morning. 

Thank you to the staff who worked on this rulemaking.

I support adopting this rule.  I see no compelling reason to prevent shareholders from mixing and matching their votes between a management and dissident slate, given that shareholders who attend meetings are already able to vote in this way.

I would have preferred, however, that today's rule include certain additional changes and believe we should continue to consider those going forward.  First, I believe we should have given greater consideration to having this rule apply to funds.  I have heard no clear argument for why they should be treated differently than operating companies for these purposes.  I hope that the Commission will take up this issue again in the near future and, if appropriate, expand the rule to include funds or explain why such an approach is unsuitable.

I also would have preferred that the rule require those launching a proxy contest to meet certain eligibility criteria, such as thresholds of ownership in the target company or holding periods for the company's stock.  Such criteria would demonstrate that a dissident has an economic stake or investment interest in the target company.  This is not unprecedented; we require eligibility criteria that includes ownership and holding period stakes for shareholders to submit proposals for a company meeting.[1]  Today's rule includes no similar eligibility requirements, which seems discordant with the approach we have taken in such other rules.  I worry that the effect of not having such criteria may make it too easy to launch a proxy contest, which can impose considerable costs on a company and by extension all of its shareholders. 

The solicitation threshold in the final rule serves somewhat of the same purpose as eligibility requirements in that it obliges the dissident to reach out to some amount of shareholders.  The inclusion of this threshold is a large reason that I am able to support the rule.  But, it is not clear to me that the 67 percent solicitation threshold is the right percentage and whether it will operate as a proper substitute for an ownership and duration threshold.  I hope that we will monitor the effects of the final rule going forward and revisit whether the percentage is set either too low or too high. 

I must also sound a note of caution about what I see as some of the inevitable indirect effects of this rule.  Beyond potentially increasing proxy contests, I worry that the rule will put even more power in the hands of the proxy advisory businesses.  As an article in the Institutional Investor noted, the pressure that dissidents face in securing the support of proxy advisory firms is significant.[2]  While these firms do not directly select a dissident's nominees for a target company's board, success in a proxy contest seems generally dependent on their support.  If it is easier to launch proxy contests, proxy advisory firms' influence will increase in line with the increased desire of dissident shareholders to replace current directors with their own candidates.

In sum, I would prefer a slightly different rule.  Ultimately, however, I believe that there are benefits to a universal proxy regime.  Therefore, I support adopting this rule today.

= = =

 

[1] 17 C.F.R. § 240.14a-8(b).

[2] See Michelle Celarier, "The Mysterious Private Company Controlling Corporate America," Institutional Investor, Jan. 29, 2018, available at www.institutionalinvestor.com/article/b16pv90bf0zbj8/the-mysterious-private-company-controlling-corporate-america.

The proposed amendments would rescind two rules applicable to proxy voting advice businesses that the Commission adopted in 2020. Specifically, the Commission is proposing to rescind conditions to the availability of two exemptions from the proxy rules' informational and filing requirements on which proxy voting advice businesses often rely. Those conditions require that: (1) registrants that are the subject of proxy voting advice have such advice made available to them in a timely manner, and (2) clients of proxy voting advice businesses are provided with a means of becoming aware of any written responses by registrants to proxy voting advice. Investors and others have expressed concerns that these conditions will impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.

The proposed amendments also would rescind the 2020 changes made to the proxy rules' liability provision. Although the changes were intended to make clear that proxy voting advice is subject to liability under the proxy rules, investors and others have expressed concerns that the 2020 changes have created confusion, increased proxy voting advice businesses' litigation risks, and potentially impair the independence and quality of the proxy voting advice. 

Thank you to the staff in the Division of Corporation Finance, Division of Economic and Risk Analysis, and the Office of the General Counsel for their exceptional and thoughtful work in advance of today's meeting.

The proposal before us, in part, addresses concerns raised by investors who utilize proxy voting advice.[1] Specifically, concerns that the existing framework jeopardizes the independence of proxy voting advice and makes the conveyance of that proxy voting advice to investors costlier and subject to delay.[2] This proposal, among other things, solicits comment on removing the obligation that Proxy Voting Advice Businesses (PVABs) must (1) make their voting advice available to the corporation the advice is about at or prior to the time they disseminate it to their clients; and (2) to inform their clients when a corporation responds to that advice.[3] Investors who engage PVABs have consistently commented that such conditions inhibit the independence of proxy voting advice by increasing a corporation's involvement in a PVAB's advice.[4]

Proxy voting advice is integral to our current system of corporate governance and shareholder democracy. And the independence of that advice is essential. Independent advice informs and empowers investors' voting decisions. Without it, investors have even less say in a structure with inherent information asymmetry that can disadvantage them. Corporations have, or at least should have, a deep and nuanced understanding of their own affairs. It is their job. Investors, the owners of the company, usually do not. And it is demonstrated that monitoring management to approximate anything close to that level of insight is difficult and costly.[5] Therefore, strengthening independence and ensuring that the costs of voting advice are not prohibitive are important objectives.[6]

I look forward to reviewing the comment letters and working with the staff as this rulemaking progresses. Thank you.

= = =

[1] See Proxy Voting Advice, Release No. 34-93595 at 8 (proposed Nov 17, 2021) [hereinafter Proposing Release].

[2] See, e.g., Proposing Release at n. 23-25 with accompanying text.

[3] See id at n. 21-25 and accompanying text.

[4] See Proposing Release n. 23-25 and accompanying text.

[5] See Paul H. Edelman, Randall S. Thomas & Robert B. Thompson, Shareholder Voting in an Age of Intermediary Capitalism, 87 S. Cal L. Rev 1359, 1383-92 (2014) (noting that gathering the information to formulate an informed vote is high for shareholders and that the gains from most governance issues are small and dispersed despite the high costs of information gathering, further a shareholder must do this for each portfolio company). Further, simply monitoring the issues in a portfolio of companies during a given proxy season is a large task. See Recommendation of the SEC Investor Advisory Committee (IAC) Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals at 15 (Jan. 24, 2021) ("[Proxy advisors] distill hundreds of pages of information in proxy statements down to a much smaller number of pages in a consistent format that is easy for clients to digest. These clients have to vote hundreds or even thousands of proxies per year . . . [it is] virtually impossible for those with voting authority to engage in a de novo review of the entirety of the information provided to them by companies, dissidents and others commenting on the votes. In short, proxy advisors are necessary for a large number of shares to be voted on an informed and timely basis.").

[6] While the role of proxy advisors in shareholder democracy has been widely debated in many circles, voting advice from professional advisors provides a counter-weight to the views and positions of management.

Proxy advisors play a unique and important role in helping shareholders vote to protect their investments and ensure their interests are being served. It is therefore important that our rules do not interfere with the independence of proxy voting advice, introduce unnecessary cost and complexity into an already compressed proxy voting process, or otherwise burden the free and full exercise of shareholder voting rights. For this reason, I'm pleased that we are revisiting certain aspects of the amendments governing proxy voting advice adopted last year so that our rules are appropriately tailored to the needs of investors and other market participants. 

Today's proposal represents a targeted reappraisal of only certain aspects of those amendments that generated substantial concern, particularly among investors (the intended beneficiaries of the changes), that we didn't get the balance right in last year's final rules. Specifically, last year's amendments included mechanisms to enhance management's influence over proxy voting advice by effectively requiring that issuers be given access to and an opportunity to respond to such advice, and that proxy advisors separately notify their clients of those responses despite the fact that they are publicly filed.[1] Last year's rules also amended a note to the proxy-related anti-fraud provisions to add examples of material misstatements or omissions related to proxy voting advice, creating uncertainty regarding the scope of liability for such advice.[2] These features of last year's rules prompted considerable concern.[3] Today's proposal responds to those concerns by proposing to eliminate the issuer access and response provisions, and clarify the scope of fraud liability for proxy advisors. 

Although we issued rules in this space last year, that does not mean that we got the balance right. Nor, as I observed at the time, does it mean that the Commission met its obligation to establish that there was any need for those features of the rulemaking to begin with.[4] In fact, it was quite clear then and now that the so-called "error rate" with respect to proxy voting advice is vanishing to none.[5] 

In addition, the fact that the Commission made fairly substantial modifications to the amendments from proposal to adoption meant that commenters did not have an opportunity to weigh in on certain features of the rules in their final form until after adoption. But now they have. And investors in particular have explained that certain features of the final rules still include the same infirmities they had identified in the proposal, namely increased risk of impaired independence and significant new costs and delays.

It is appropriate for the Commission to consider and respond to that feedback. It is also entirely in keeping with Commission precedent to review recent rules (sometimes even before their compliance date) in response to feedback from market participants.[6] Thus, today's proposal takes another look at certain aspects of last year's amendments, while leaving in place others - such as provisions that increase needed transparency around conflicts of interest - so that our rules may better facilitate the provision of timely and independent proxy voting advice.

I'm pleased to support the proposal, and I want to thank the staff for their hard work and the thoughtfulness of their approach. I look forward to reviewing comments on how we can better calibrate our rules to facilitate robust and informed shareholder voting.

= = =

 

[1] Last year's amendments added a new condition to the availability of an exemption from the information and filing requirements of the proxy rules for proxy voting advice. Specifically, the new condition required that proxy advisors adopt and publicly disclose policies and procedures reasonably designed to ensure that (1) 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 advisor's clients; and (2) proxy advisors provide their 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 addition, the amendments set forth safe harbors for satisfying this new condition, including requirements that the proxy advisor make its advice available to registrants at no charge and that the proxy advisor provide a hyperlink to any registrant response. See Exemption from Proxy Rules for Proxy Voting Advice, Final Rule, Release No. 34-89372 (July 22, 2020).

[2] See Proxy Voting Advice, Proposed Rule, Release No. [], 22 (Nov 17, 2021) ("PVABs [proxy advisors], their clients and other investors continue to express concerns and uncertainty regarding the extent of PVABs' liability under Rule 14a-9.") [hereinafter Proposing Release].

[3] Proposing Release at 12-13 ("Notwithstanding our efforts to adopt somewhat more limited and principles-based requirements in the 2020 Final Rules, investors have asserted that the Rule 14a-2(b)(9)(ii) conditions nevertheless will impose increased compliance costs on PVABs and impair the independence and timeliness of their proxy voting advice and that such effects are not justified or balanced by corresponding investor protection benefits.").

[4] See Allison Herren Lee, Paying More For Less: Higher Costs for Shareholders, Less Accountability for Management (July 22, 2020) ("It's true that the final rules have been adjusted from the proposal in response to public outcry. While I appreciate the thought and effort by my colleagues that went into some of the changes, making the final rules less objectionable than the proposal does not relieve the Commission of its fundamental obligation to identify the need for this rulemaking and to explain how the rules we are adopting will meet this need.").

[5] See id. ("The final rules will still add significant complexity and cost into a system that just isn't broken, as we still have not produced any objective evidence of a problem with proxy advisory firms' voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error-in nature or number. Nothing."); see also Recommendation of the SEC Investor Advisory Committee (IAC) Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020) ("From over 17,000 shareholder votes over three years, the number of possible factual errors identified by companies themselves in their proxy supplements amounts to 0.3% of proxy statements - and none of those is shown to be material or to have affected the outcome of the related vote.").  

[6] See, e.g., Proposed Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements, Proposed Rule, Release No. 34-85823 (May 10, 2019) (proposing to amend recently adopted provisions relating to the cross border application of certain security based swap requirements prior to their compliance date in response to "market participants and other commenters [who] have raised concerns regarding possible disruptive effects of the above requirements, suggesting that the  requirements would create significant operational burdens and impose unwarranted costs"); Investment Company Liquidity Disclosure, Proposed Rule, Release No. IC-33046 (Mar. 14, 2018) (proposing to amend recently adopted provisions governing fund liquidity disclosure prior to their compliance date, noting that "we have received letters raising concerns that the public disclosure of a fund's aggregate liquidity classification information on Form N-PORT may not achieve our intended purpose and may confuse and mislead investors" and that "these letters have caused us to question whether the current approach of disclosing aggregate liquidity fund profiles through Form N-PORT is the most accessible or useful way to facilitate public understanding of fund liquidity").

I cannot support today's proposal.  The Commission lacks a sound basis for seeking to amend a brand new rule.  Nothing has changed since we adopted the rule, and we have not learned anything new.  The release takes a stab at justifying the rewrite, but we might as well simply acknowledge that the political winds have shifted.

In July 2020, after a lengthy and thorough rulemaking process, the Commission adopted final rules regarding proxy voting advice.[1]  Shortly thereafter, the largest U.S. proxy voting advice business ("PVAB") initiated litigation challenging the 2020 Final Rules.  Fast forward to June 2021, and Chair Gensler directed the staff to reconsider the rules.[2]  So here we are today.

The first proposed amendment goes to the heart of the rule.  It would eliminate conditions designed to facilitate effective engagement between PVABs and companies and to ensure that PVAB clients have more transparent, accurate, and complete information to consider when making voting decisions.  The release cites two justifications for running away from these common-sense reforms.  First, it points to continued opposition to the 2020 Rules by PVABs and their clients.  The Commission considered concerns raised by all commenters during the rulemaking process and modified the 2020 Final Rules in response to these concerns.  The release fails to identify any new concerns.  Perhaps we will hear them during the comment period.  Second, the release points to the "PVABs' efforts to develop industry-wide practices, as well as improve their own business practices."  The Commission, however, was well aware of these efforts during its last rulemaking process.  The only new piece of information for the Commission to consider is that one major PVAB is engaging less with issuers.[3]  That bit of news should only underscore the justification for the 2020 Final Rules. 

The second proposed amendment to remove note (e) to Rule 14a-9 is also a head-scratcher.  The release notes that PVABs and their clients continue to worry that mere differences of opinion regarding proxy voting advice will form the basis for liability.  Never mind the Commission's explicit rejection of liability on these grounds in the 2020 Final Rules.[4]  The perplexing "fix" to the non-problem is to delete note (e) from Rule 14a-9, while reaffirming in the release the substance of the note as guidance.  If the Commission still believes that note (e) is true, then why does deleting the note from the rule and repeating it in the release make sense?

I appreciate the staff's efforts to make this a coherent proposal.  You did the best you could since nothing has changed and we have not received any new information to warrant a new rulemaking.  I simply cannot pretend that this is a normal course of action for the Commission.  A more reasonable approach would be to commit to a retrospective review of the 2020 Final Rules after three or five years to evaluate their effectiveness.

= = =

 

[1] See Exemptions from the Proxy Rules for Proxy Voting Advice, Rel. No. 34-89372 (July 22, 2020), https://www.sec.gov/rules/final/2020/34-89372.pdf.

[2] Commissioner Roisman and I expressed concerns with the June 2021 actions by Chair Gensler and the SEC staff.  See Response to Chair Gensler's and the Division of Corporation Finance's Statements Regarding the Application of the Proxy Rules to Proxy Voting Advice (June 1, 2021), https://www.sec.gov/news/public-statement/peirce-roisman-response-statements-application-proxy-rules-060121.

[3] See today's Proxy Voting Advice Proposing Release at note 48 and accompanying text. 

[4] See note 1 at page 132.

Over the past several years, much has been said about what the rise in fund ownership throughout our equity markets might mean for our economy.[1]  But one outcome of increasing fund growth is clear: as funds come to own an ever larger percentage of U.S. corporate equities, they can influence the outcome of a variety of matters that companies submit to a shareholder vote.[2]  As recently as a month ago,[3] the Commission acknowledged this fact and pursued policies designed to ensure that those who manage funds approach voting in a manner that serves the best interest of their clients.[4]

I. The Importance of Proxy Voting Advice to Investors

One cannot consider the implications of fund voting without also considering the role of those unique businesses that have become integral to the voting processes of so many asset managers: proxy voting advice businesses, also known as proxy advisory firms or proxy advisors.[5]  Since fund portfolios often hold securities of many public companies, asset managers often face the prospect of voting on hundreds-if not thousands-of proposals relating to hundreds of fund portfolio companies each year, with the significant portion of those voting decisions concentrated in a period of a few months.[6]  Proxy advisory firms offer services to assist them.  Most substantively, these services include providing research and analysis regarding the matters subject to a vote; developing voting guidelines that asset managers can adopt; and making recommendations about how funds should vote on specific matters.[7]  Proxy advisors also commonly provide electronic vote management systems through which asset managers can access not only their voting advice, but also proxy ballots pre-populated with the proxy advisor's voting recommendations, ready for submission to be counted.[8]

In the U.S., two proxy advisory firms serve almost the entire market,[9] providing proxy advisory services to thousands of funds each year that each exercise voting authority over a huge number of shares.[10]  Given this widespread reliance on the services of such a small number of proxy advisors, it is clear that these firms' advice has the potential to affect a huge number of matters up for a vote across our markets.

The Commission has stated that it is a matter of vital importance to ensure that the voting advice these firms provide is based on the most accurate information reasonably available and that the businesses providing such advice be sufficiently transparent with their clients about the processes and methodologies used to formulate their advice.[11]

II. The 2020 Final Rules: Culminating Nearly a Decade's Worth of Work

To achieve these goals, the Commission engaged in a rulemaking process that was more extensive and thorough than is typical.  We held a roundtable in 2018 and collected hundreds of public comments;[12] we proposed rules in 2019,[13] which accounted not only for the feedback from this roundtable but also from a decade's worth of comment letters the Commission had received on proxy voting matters after holding events addressing these issues in prior years.[14]  We responded to comments received on the 2019 proposed rules by tailoring requirements in the final rules to address commenters' concerns, and we adopted the final set of rules just over a year ago (the "Final Rules").[15]

It is not an exaggeration to say that these Final Rules are the product of roughly a decade's worth of thinking and public feedback on how the Commission could promulgate regulations that would improve the quality of proxy voting advice available in our markets.

The Final Rules took a two-pronged approach to overseeing proxy voting advice, requiring proxy advisory firms to: (1) prominently disclose material conflicts of interest to their clients along with any policies and procedures regarding how the firm addresses such conflicts (referenced herein as the "conflict of interest disclosures")[16]; and (2) have written policies and procedures reasonably designed to ensure that (i) companies that are the subject of the proxy advisors' voting advice have such advice made available to them at or prior to the time such advice is provided to proxy advisory clients,[17] and (ii) clients (i.e. those asset managers who exercise votes on behalf of others, including retail investors) have a mechanism by which they can reasonably be expected to become aware of any written statements from those companies.[18]  (I'll refer to these policies and procedures as the "engagement policies.")

Together, the conflict of interest disclosures and the engagement policies were intended to ensure that those who use proxy voting advice receive more transparent, accurate, and complete information on which to make their voting decisions.[19]

Sadly, the Final Rules were never permitted to take effect.[20] 

III. Peeling Back Regulatory Protections . . .

Today's proposal is an explicit attempt to peel back their protections. 

The proposal would remove the affirmative obligation on proxy advisory firms to have engagement policies.[21]  This obligation was integral to the Final Rules as the Commission determined it would allow for investors to have access to more materially accurate, transparent, and complete information when they vote proxies.[22]  The engagement policies were considered especially important protections for retail investors, who increasingly invest money in our markets through asset managers and rely on those managers to vote proxies in ways that serve their best interest, based on materially complete and accurate information.

Yet, the proposal would replace this obligation with . . . nothing. 

It would not have the Commission impose any requirement that the proxy advisors have any form of an engagement policy.  Oddly, the proposal attempts to justify this repeal by noting that a few of the proxy advisors already do similar things by way of engagement.  But each practice that the proposal cites to support of this rationale existed at the time the Commission adopted the Final Rules.[23]  Each was considered by the Commission and was either rejected as inadequate to accomplish the goals of the rulemaking, or it informed those requirements that the Commission believed should apply to all participants in the proxy advisory industry.  In fact, the only development that seems to have transpired since we adopted the Final Rules is that the largest U.S. proxy advisory firm has decided to engage less with the companies it reviews-not more-which is a development overtly counter to the Final Rules.[24]

Should the proposal be adopted today, I see no reason to believe that the Commission will achieve the same important investor protections we hoped to attain through the Final Rules.  And we should be clear about that result rather than pretend the proposal's effect will be so minimal.

A. . . . Without Clear Justification

Troubling to me, I found the proposal lacks many of the due process and procedural protections that usually guide Commission rulemakings.  It does not squarely answer the question of why we would peel back our existing rules, which were the product of substantial Commission and staff work and which had undergone the rigor of the Administrative Procedure Act.  Nor does the proposal answer the question why now, before these rules have even taken effect.

One rationale is purportedly that investors who use proxy voting advice had "strong concerns."[25]  But the sources supporting this claim include: a news article that quoted market participants both favoring and disfavoring the Final Rules[26] and a statement from one advocacy group on the day that the Final Rules were adopted speculating on their contents.[27]  From these sources, it is impossible to discern what concerns investors actually have about the Final Rules.

The proposal does go on to cite a closed-door meeting that a group of 16 asset managers and five advocacy groups held with the Chair this past June, where those present "expressed concerns about the costs associated with the [Final Rules], including the Rule 14a-2(b)(9)(ii) conditions, and the general lack of corresponding investor protection-based benefits," in their view.[28]  However, no other details about this seemingly determinative meeting are shared, including how the Final Rules fail to address these concerns.  Nor does the proposal explain why the views of these particular market participants should be considered separately from those of every other market participant, who has weighed in during our lengthy rulemaking process or expressed opinions in the time that has followed.

We cannot forget that those who bear the consequences of asset managers' voting practices are ultimately the retail investors, who may have their life savings invested in funds run by asset managers.  These individuals are the primary "investors" I believe the SEC is charged to protect.  I do not see how we protect those Main Street investors by peeling back the protections our Final Rules would have effectuated.[29]  Nor do I see how these individual investors will be served by lessening the obligations on investment advisers who vote proxies for the funds in which they invest, as the proposal also contemplates doing.[30]

IV. Special Treatment for Proxy Advisors?

In light of these considerations, the proposal suggests an entirely different approach to overseeing those entities whose actions the Commission so recently judged to materially influence investors and our marketplace. 

A. Unusual and Surprising Deference to Self-Created Best Practices

Most notably, the proposal attempts to justify peeling back the Final Rules' protections by suggesting that Commission oversight of proxy advisory firms may be unnecessary.  To support eliminating the Final Rules' requirement for engagement policies, the proposal deferentially recounts the recent efforts of proxy advisors to develop industry-wide standards through a "Best Practices Principles Group"[31] and references a report of this group's "Independent Oversight Committee" that found all six proxy advisors in this group met the standards established in the three best practices principles.[32] 

While I agree that these industry efforts to create and uphold standards appear positive, they are hardly well enough established for this Commission to consider them as replacements for key provisions of our recently adopted Final Rules.  This Best Practices Principles Group is a consortium of six proxy advisory firms, including those two that have the most far-reaching influence over the U.S. market[33]-these are the very firms the Commission sought to more closely regulate when it enacted the Final Rules.  The current best practice principles themselves are barely two years old.[34]  Indeed the oversight committee that reviewed proxy advisors' adherence to them is the inaugural committee conducting its first review.[35]  And, while the plan going forward for this oversight committee seems to be that its members will be fully independent of the proxy advisory firms themselves, for purposes of composing this inaugural committee, it was the proxy advisors in the group that "made final selections of members to serve."[36]  Moreover, the committee's budget is funded by the proxy advisors whose practices are subject to review (with half of the funding coming from the two largest U.S. proxy advisors).[37]

This is not the same as Commission regulation.

Nor am I aware of meaningful precedent for the deference with which the proposal appears to discuss these nascent efforts at self-regulation.  We have not historically allowed a consortium of market participants to make up their own rules-or principles and standards, in this case-to follow, with no Commission oversight or engagement.[38]

B. Would We Really Limit Liability for Making False Statements?

Along these same lines, the proposal would also remove a note from the text of Rule 14a-9, which the Final Rules recently added, and would replace it with certain guidance as articulated in the proposal's release.

The rationale for this change is puzzling.  Note (e) of Rule 14a-9 articulated that "the failure to disclose material information regarding proxy voting advice . . . could, depending upon particular facts and circumstances, be misleading within the meaning of the rule."[39]  According to the proposal, the addition of Note (e) appears "to have unintentionally created a misperception. . .[purporting] to determine or alter the law governing Rule 14a-9's application and scope, including its application to statements of opinion."[40]  However, the proposal cites no sources which make this claim about the actual Final Rules.  Instead, the proposal cites several comment letters on the original 2019 proposed rules.[41]  The concerns outlined by those comment letters were specifically addressed in the Final Rules.[42]  The proposal cites no source that Note (e), as understood after the explanation in the Final Rules' release, causes any "misperceptions" warranting deletion.  And the proposal admits that there are no significant benefits to deleting the note other than avoiding this purported misperception.[43]  Given that the misperception was already addressed and clarified  by the Final Rules, and that there is no other benefit to be had by deleting the note, I do not see why Note (e) of Rule 14a-9 should be removed.

The proposal notes that one alternative path considered in addressing this alleged misperception was to "exempt certain portions of proxy voting advice from Rule 14a-9 liability" altogether.[44]  I appreciate that this course of action was not actually proposed here, yet the proposal does seek public input on this as a potential course of future action.[45]  While I do not believe this was the likely intention, it seems to me that this change could effectively allow proxy advisors to make false and misleading statements when providing proxy voting advice without liability.  

I cannot think of any other type of market participant that is allowed such leeway in conducting proxy solicitations.  The Commission must apply its rules equally to all those we regulate, and our regulation of market participants who solicit proxies is no different.  A carve-out from liability for making false and misleading statements is not aligned with our mission.

V. Conclusion

In sum, I cannot support this proposal and remain firm in my belief that the Final Rules should be allowed to take effect.  They still offer the important investor protections the Commission aimed to achieve when they were adopted, and they would level the playing field for proxy advisory firms to compete in a transparent and improved manner.

Moreover, I urge the Commission to rethink this rulemaking process.  Whereas the Final Rules were developed based on years' worth of information and deliberation, and support for their requirements was clearly delineated in a transparent administrative process, this proposal's rationale is not so well-supported and the process through which it was developed raises questions about its thoroughness.  Offering such little transparency into our process or reasoning for considering dramatic changes to recently adopted rules can lead people to worry about the efficacy and longevity of our rulemakings.  This is poor precedent for our Commission to overturn thoughtfully developed regulation so lightly.  Thus, I respectfully dissent.[46]

 = = =

[1] See, e.g., John C. Coates, "The Future of Corporate Governance Part I: The Problem of Twelve" (Sept. 20, 2018), at 14 https://corpgov.law.harvard.edu/wp-content/uploads/2019/11/John-Coates.pdf ("We are rapidly moving into a world in which the bulk of equity capital of large companies with dispersed ownership will be owned by a small number of institutions.")

[2] See Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Rel. No. 34-93169 (Sept. 29, 2021), at 7 https://www.sec.gov/rules/proposed/2021/34-93169.pdf ("Funds own around 30 percent of U.S. corporate equities and in some cases funds hold a larger percent of a single company's stock. As a result, funds can influence the outcome of a wide variety of matters that companies submit to a shareholder vote, including matters related to governance, corporate actions, and shareholder proposals.") (Internal citations omitted).

[3] See id.

[4] See id.  See also Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Advisers Act Release No. 5325 (Aug. 21, 2019), https://www.sec.gov/rules/interp/2019/ia-5325.pdf (hereinafter "Adviser Proxy Voting Guidance"); Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5547 (July 22, 2020), https://www.sec.gov/rules/policy/2020/ia-5547.pdf (hereinafter "Advisor Robo-Voting Guidance").  See also Proposed Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Rel. No. 34-87457 (Nov. 5, 2019), https://www.sec.gov/rules/proposed/2019/34-87457.pdf (hereinafter, "2019 Proposed Rules") (addressing obligations of those businesses that provide proxy voting advice, including to investment advisers); Exemptions from the Proxy Rules for Proxy Voting Advice, Rel. No. 34-89372 (July 22, 2020), https://www.sec.gov/rules/final/2020/34-89372.pdf (hereinafter, "Final Rules") (adopting final rules for proxy voting advice businesses).

[5] See Adviser Proxy Voting Guidance, supra note 4.

[6] See 2019 Proposed Rules, supra note 4, at 7.

[7] Id. at 8.

[8] Id. at 9.

[9] Final Rules, supra note 4, at 152.

[10] The largest proxy advisory firm in the U.S. (Institutional Shareholder Services, or "ISS") reported that it had approximately 2,000 institutional clients in 2019.  Another major firm, Glass, Lewis & Co., LLC ("Glass Lewis"), reported that, as of 2019, it had "1,300+ clients, including the majority of the world's largest pension plans, mutual funds, and asset managers, who collectively manage more than $35 trillion in assets."  2019 Proposed Rules, at 10, note 18. 

[11] 2019 Proposed Rules, at 10 ("Given these market realities, it is vital that proxy voting advice be based on the most accurate information reasonably available and that the businesses providing such advice be sufficiently transparent with their clients about the processes and methodologies used to formulate the advice.")

[12] See Roundtable on the Proxy Process (Nov. 15, 2018), comments available at https://www.sec.gov/proxy-roundtable-2018.

[13] See 2019 Proposed Rules supra note 4.

[14] See Proxy Voting Roundtable (Feb. 19, 2015), comments available at https://www.sec.gov/comments/4-681/4-681.shtml; Roundtable on Proxy Advisory Services (Dec. 5, 2013), comments available at https://www.sec.gov/spotlight/proxy-advisory-services.shtml.  See also Concept Release on the U.S. Proxy System, Rel. No. 34-62495 (Jul. 14, 2010), https://www.sec.gov/rules/concept/2010/34-62495.pdf, comments available at https://www.sec.gov/comments/s7-14-10/s71410.shtml.

[15] See Final Rules, supra note 4.

[16] See Exchange Act Rule 14a-2(b)(9)(i).

[17] See Exchange Act Rule 14a-2(b)(9)(ii)(A).

[18] See Exchange Act Rule 14a-2(b)(9)(ii)(B).

[19] See Final Rules, at 1.

[20] See Securities and Exchange Commission, Division of Corporation Finance, "Statement on Compliance with the Commission's 2019 Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b), 14a-9" (June 1, 2021), https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01; Chair Gary Gensler, "Statement on the application of the proxy rules to proxy voting advice" (June 1, 2021), https://www.sec.gov/news/public-statement/gensler-proxy-2021-06-01.  See also Commissioner Hester M. Peirce & Commissioner Elad R. Roisman, "Response to Chair Gensler's and the Division of Corporation Finance's Statements Regarding the Application of the Proxy Rules to Proxy Voting Advice" (June 1, 2021), https://www.sec.gov/news/public-statement/peirce-roisman-response-statements-application-proxy-rules-060121.

[21] Proposed Amendments on Proxy Voting Advice, Rel. No. 34-93595 (Nov. 17, 2021) (hereinafter, the "Proposal"), https://www.sec.gov/rules/proposed/2021/34-93595.pdf ("We are proposing to amend Rule 14a-2(b)(9) by deleting paragraph (ii) and rescinding the Rule 14a-2(b)(9)(ii) conditions.")

[22] Final Rules, at 87 ("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.")

[23] See id. at 157-160; see also id. at 185-193 (references to "existing practices").

[24] See Cimi Silverberg and Caprice Herjavec, "ISS Discontinues S&P 500 Proxy Report Draft Review Process," FW Cook (Nov. 5, 2020), https://www.fwcook.com/Blog/ISS-Discontinues-SP-500-Proxy-Report-Draft-Review-Process/.

[25] Proposal at 12-13.

[26] See id. at note 23, citing Peter Rasmussen, Divided SEC Passes Controversial Proxy Advisor Rule, Bloomberg Law (Jul. 29, 2020), available at https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-divided-sec-passes-controversial-proxy-advisor-rule.  The Proposal cites this article for reporting certain criticism of the Final Rules from one source.  It neglects to reference the rest of this article, which reports an alternative view from another source: "Rule proponents see the rules as a measured response to a significant problem of interest conflicts and erroneous reporting."

[27] See id. at note 22, citing Council of Institutional Investors, Leading Investor Group Dismayed by SEC Proxy Advice Rules (Jul. 22, 2020), https://www.cii.org/july22_sec_proxy_advice_rules ("[T]he new rules . . . seem to effectively require investment advisors who vote proxies on behalf of investor clients to consider and evaluate any response from companies to proxy advice before submitting votes. That could cause significant delays in the already constricted proxy voting process. It also could jeopardize the independence of proxy advice as proxy advisory firms may feel pressure to tilt voting recommendations in favor of management more often, to avoid critical comments from companies that could draw out the voting process and expose the firms to costly threats of litigation." (Emphasis added).

[28] Id. at note 23.

[29] In fact, the proposal describes the benefits of eliminating the engagement policies as accruing predominately to proxy advisors.  See id. at 42-46.  Notably, the costs are expected to fall on others, including investors.  See id. at 46-47.

[30] See id. at 24 (Question 6, asking if the Commission should reconsider the Adviser Robo-Voting Guidance).

[31] Id. at 14-18, 22.

[32] Id. at 14-18.

[33] See id. at 14, note 27.

[34] See "Best Practice Principles Group for Shareholder Voting Research Leading Global Shareholder Voting Research & Analysis Providers Commit to New Governance & Oversight Structure in Independently Reviewed Updated 2019 Principles" (July 22, 2019), https://bppgrp.info/bpp-group-launches-new-2019-best-practice-principles-for-shareholder-voting-research-analysis/.

[35] See Annual Report 2021, Independent Oversight Committee of the Best Practice Principles for Providers of Shareholder Voting Research & Analysis (hereinafter "Industry Committee Report"), https://bppgrp.info/wp-content/uploads/2021/07/2021-AR-Independent-Oversight-Committee-for-The-BPP-Group-1.pdf.

[36] Id. at 11 ("The clear intent of founders was that the Committee be fully independent of Signatories in its judgments, though candidates would be selected in part based on the presumption that they acknowledge the importance of the industry and its duties to investor clients.  While the Signatories themselves made final selections of members to serve on the founding Committee, the IOC named a Nominations Subcommittee at its 11 May 2021 meeting to begin reviewing changes to the appointments process.")

[37] See id. at 29 (table showing that Glass Lewis & Co., LLC and Institutional Shareholder Services Inc. each fund 26.25% of the committee's budget).

[38] There are many instances in which self-regulatory organizations are recognized by the Commission, but these organizations-such as the exchanges-are also subject to direct oversight by the Commission.  To the extent that fully self-regulatory organizations have meaningful influence over their members, these organizations often draw their authority from the market forces that provide a benefit to members policing one another.  For example, membership in a professional organization can confer status if the organization is known for holding its members to certain standards.  However, the market for proxy advisors in the United States is small and highly concentrated.  See Proposal at 36, note 106 and associated text.  Accordingly, it is not at all clear whether those forces are strong enough to incentivize self-policing.

[39] Final Rules, at 131.

[40] Proposal, at 28.

[41] See id., note 79.  This footnote references seven comment letters published between January 31, 2020 and February 7, 2020.  The Final Rules were released on July 22, 2020.  See Final Rules, at 247.

[42] See Final Rules, at 132 ("Although we acknowledge commenters' concerns around the potential for heightened litigation risk associated with the proposed changes to Rule 14a-9, 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 or create a new cause of action, as some have suggested.") (This section of the Final Rules cites to several of the same comment letters that the proposal now cites to say that a misperception exists about heightened liability.)

[43] See Proposal, at 46 ("Lastly, we do not expect the proposed deletion of paragraph (e) to the Note to Rule 14a-9 to generate any significant benefits other than avoiding any misperception that the 2020 Final Rules' addition of that paragraph purported to determine or alter the law governing Rule 14a-9's application and scope, including its application to statements of opinion.  Notwithstanding this proposed deletion, a PVAB may still be subject to liability under Rule 14a-9, depending on the facts and circumstances, for a materially misleading statement or omission of fact, including with regard to its methodology, sources of information or conflicts of interest.  Thus, we expect that this proposed amendment would not have any significant economic effect." (Emphasis added)).

[44] Id., at 51.

[45] See id.  (Stating that this type of exemption would "differ[] from existing law" and "may generate additional uncertainty and litigation.")

[46] My criticism of this rulemaking does not extend to the work of the SEC staff, who have worked hard to find support for and draft this rulemaking.  I appreciate their work and extensive background in this area.  My concern lies with the Commission's policy choice in pursuing such a dramatic change to so recently adopted Commission rules.

• Securities Industry Commentator
• Bill Singer