The Wall Street Legal & Regulatory Feed

Securities Industry Commentator by Bill Singer Esq

July 14, 2022












https://www.brokeandbroker.com/6553/bousted-atif-leaping/
In today's blog we come upon a convoluted dispute involving an underwriter, two companies, two deals, two agreements, one IPO goes forward, one IPO gets withdrawn, then the IPO'd company acquires the other non-IPO'd company, and . . . omigod, what a mess! Was a success fee earned for one or two or three deals? Did FINRA have to approve all three purported transactions or only two or one? 

As set forth in the 5Cir's Syllabus:

The defendants settled a civil enforcement action that the Securities and Exchange Commission ("SEC") brought against them for alleged securities violations. Following its standard policy, the SEC barred the defendants from denying that they engaged in the charged conduct as a condition of settlement (the "no-deny policy"). The parties executed consent agreements containing provisions to that effect and submitted them to the district court, which entered final judgments. Five years later, the defendants filed a motion under Rule 60(b)(4) and 60(b)(5) seeking relief from the final judgments to the extent that they incorporated the no-deny policy. They argued that the no-deny policy violates their First Amendment and due process rights. The district court denied the motion, and the defendants appealed. For the reasons that follow, we AFFIRM.

Also, note this Concurrence:

Edith H. Jones, Circuit Judge, joined by Duncan, Circuit Judge, concurring: 

I am pleased to concur in my colleague's opinion denying relief on these defendants' post-judgment motions. I write to note that nothing in the opinion (or in the district court opinion, for that matter) approves of or acquiesces in the SEC's longstanding policy that conditions settlement of any enforcement action on parties' giving up First Amendment rights. 17 C.F.R. § 202.5(e). If you want to settle, SEC's policy says, "Hold your tongue, and don't say anything truthful--ever"-or get bankrupted by having to continue litigating with the SEC. A more effective prior restraint is hard to imagine. The defendants' brief informed us that a petition to review and revoke this SEC policy was filed nearly four years ago. New Civil Liberties Alliance, Petition to Amend (Oct. 30, 2018), available at http://bit.ly/2xfFD3Z. However, SEC never responded to the petition. Given the agency's current activism, I think it will not be long before the courts are called on to fully consider this policy

https://www.sec.gov/litigation/litreleases/2022/lr25443.htm
In Complaints filed in the United States District Court for the Southern District of Florida, the SEC charged Manuel Alvis, Joseph Boulos, Carlos Pingarron, and Carlos Sorondo with violations of the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act and the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. As alleged in part in the SEC Release:

The Securities and Exchange Commission today announced charges against four individuals for unlawfully selling securities of Sky Group USA, LLC, a payday loan company based in Miami, Florida. The SEC previously charged Sky Group and its owner and CEO with fraudulently raising at least $66 million through the sale of securities in the form of promissory notes to more than 500 retail investors, including many members of the South Florida Venezuelan-American community.

The SEC's complaints allege that Manuel Alvis, Joseph Boulos, Carlos Pingarron, and Carlos Sorondo, four of Sky Group's top-selling sales agents, collectively offered and sold more than $25 million in Sky Group's unregistered promissory notes to at least 346 investors. According to the complaints, the defendants marketed the promissory notes to investors. The defendants collectively earned millions of dollars in commissions on their sales, even though they were not registered as broker-dealers or associated with registered broker-dealers.
https://www.sec.gov/news/press-release/2022-120
The SEC adopted amendments to its proxy voting advice rules. https://www.sec.gov/rules/final/2022/34-95266.pdf As asserted in the SEC Release:

The final amendments rescind two rules applicable to proxy voting advice businesses that the Commission adopted in 2020. Specifically, the final amendments rescind conditions to the availability of two exemptions from the proxy rules' information 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. Institutional investors and other clients of proxy voting advice businesses have continued to express concerns that these conditions could impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.

The final amendments also delete the 2020 changes made to the proxy rules' liability provision. Although the 2020 changes were intended to clarify the application of this liability provision to proxy voting advice, they instead created a risk of confusion regarding the application of this provision to proxy voting advice, undermining the goal of the 2020 changes. The final amendments address the confusion while affirming that proxy voting advice generally is subject to liability under the proxy rules.

Finally, the adopting release rescinds guidance that the Commission issued in 2020 to investment advisers regarding their proxy voting obligations.


The free and fair exercise of shareholder voting rights is essential to a well-functioning system of corporate democracy, one that helps ensure that shareholders can exercise appropriate oversight of the companies they own. As shareholders increasingly vote through institutional asset managers, proxy advisors play a unique and important role in informing that process and enabling shareholders to protect their interests and their capital.  

Individual shareholders and individual asset managers generally cannot afford to conduct, on their own, the kind of research proxy advisors provide. It is therefore critically important that the Commission's regulation of proxy advisors does not impede the provision of timely and independent proxy voting advice or otherwise create unnecessary burdens on the exercise of shareholder voting. For that reason, I'm pleased to support today's amendments reconsidering certain aspects of our rules and guidance regarding proxy voting advice.

Specifically, the Commission is rescinding two elements of its 2020 proxy advisor rules that generated significant concerns among investors and other commenters. The first involves mechanisms to enhance management's influence over proxy voting advice by effectively requiring that issuers be given advance access 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] The second change rescinds a note to the proxy-related anti-fraud provisions which added examples of misstatements related to proxy voting advice that created uncertainty regarding the scope of liability for such advice.

In addition to eliminating these provisions, the Commission is rescinding certain supplemental guidance for investment advisers that was issued in connection with the 2020 amendments in response to comments that such guidance was unnecessary in light of existing previous guidance, risked increasing uncertainty regarding adviser obligations, and no longer made sense in light of the rescission of related provisions of the 2020 rules.[2] At the same time, the Commission is retaining other elements of its recent regulation of proxy advisors including the guidance issued in 2019 and the provisions of the 2020 rulemaking designed to enhance disclosure regarding conflicts of interest.

The result of the amendments we adopt today will be better tailored and supported rules governing proxy voting advice that better balance the needs of investors and other market participants and better reflect the data we have available to us. On that last point, over the years, the Commission has gathered information regarding the proxy voting system through, for example, the issuance of a 2010 concept release[3] and the convening of a 2018 roundtable,[4] among other mechanisms.[5] This extensive gathering of data and views has identified evidence of a number of areas of concern related to proxy voting and potential reforms in that space. We know, for example, that many shareholders are unable to confirm their shares are voted in accordance with their instructions, a concern that could be addressed through required end-to-end vote confirmations.[6] There are likewise concerns about disclosure of voting information by funds that could be addressed by enhancements to Form N-PX.[7]

There was, however, throughout the information gathering process engaged in by the Commission, an absence of any credible evidence suggesting pervasive, or even moderate, errors in proxy voting advice.[8] In fact, the Commission's analysis has shown that the supposed error rate for proxy voting advice is vanishing to none.[9] Not only was there no clear basis for a rule that increased the involvement of conflicted parties in proxy voting advice, but investors (the supposed beneficiaries of the new rules) stated emphatically that this aspect of the new rules would interfere with, rather than promote, efficient proxy voting by introducing unnecessary cost and delay and increasing the risk of impaired independence.[10]

Today's rulemaking is responsive to those concerns. It is also responsive to the consistent feedback and data the Commission has received regarding proxy voting advice, both historically and in response to the proposal we finalize today.

It is appropriate for the Commission from time to time to evaluate its rules and, where appropriate, make adjustments that reflect our best knowledge and judgment. Sometimes re-evaluations occur after many years, and sometimes after only a short time. In fact, the Commission changed course with respect to rules that had been on the books a very short time in 2018, 2019, and 2020.[11] This is not a new phenomenon. I hope the Commission will continue to re-evaluate rules when it has well-substantiated reason to do so. In addition, I hope the Commission also continues to evaluate the proxy voting system and consider ways to improve its transparency, accuracy, and efficiency, including through consideration of end-to-end vote confirmation and adoption of enhancements to Form N-PX.

Let me conclude by thanking the staff in the Divisions of Corporation Finance, Investment Management, and Economic and Risk Analysis, as well as the Office of the General Counsel for the diligent, thoughtful, and careful work on this release. I'm pleased to support today's amendments. Thank you.

 
[1] The 2020 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. Moreover, the 2020 adopting release expressly encouraged proxy advisors to provide registrants with advance review of proxy voting advice. See Exemption from Proxy Rules for Proxy Voting Advice, Final Rule, Release No. 34-89372 (July 22, 2020).

[2] See Proxy Voting Advice, Final Rule, Release No. 34-[x], 41, n.161 (July 13, 2022) [Adopting Release].

[3] See Concept Release on the US Proxy System, Release No. 34-62495 (July 14, 2010) [Proxy Concept Release].

[4] See Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 2018).

[5] See, e.g., Universal Proxy, Proposed Rule, Release No. 34-79164 (Oct 26, 2016); Reporting of Proxy Votes on Executive Compensation and Other Matters, Proposed Rule (Oct. 8, 2010). Release Nos. 34-63123; see also Recommendation of the SEC Investor Advisory Committee (IAC) Proxy Plumbing (Sept. 5, 2019). 

[6] See Proxy Concept Release at 40 ("In the Commission's view, both record owners and beneficial owners should be able to confirm that the votes they cast have been timely received and accurately recorded and included in the tabulation of votes, and issuers should be able to confirm that the votes that they receive from securities intermediaries/proxy advisory firms/proxy service providers on behalf of beneficial owners properly reflect the votes of those beneficial owners. . . . One possible solution may be for all participants in the voting chain to grant to issuers, or their transfer agents or vote tabulators, access to certain information relating to voting records, for the limited purpose of enabling a shareholder or securities intermediary to confirm how a particular shareholder's shares were voted.").

[7] Id. at 49 ("We seek to examine whether Form N-PX should be amended to require disclosure of the actual number of votes cast by funds."); see also Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Proposed Rule, Release No. 34-93169 (Sept. 29, 2021) ("To improve the utility of Form N-PX information for investors, we are proposing amendments to enhance the information funds currently report about their proxy votes on Form N-PX and to make that information easier to analyze.").

[8] See Allison Herren Lee, Paying More For Less: Higher Costs for Shareholders, Less Accountability for Management (July 22, 2020)  ("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.").

[9] See Adopting Release at 32, n.127 ("[T]he ACCF study identified 50 and 42 instances, respectively, in 2021 and 2020 in which registrants filed supplemental proxy materials to dispute the data or analysis in a PVAB's proxy voting advice, when compared to the 5,565 and 5,350 unique registrants that filed proxy materials with the Commission in 2021 and 2020, respectively . . . that study indicates that only 0.90% of all registrants disputed a PVAB's proxy voting advice in supplemental filings in 2021, which is only a 0.11% increase (i.e., 0.90% versus 0.79%) from 2020. Finally, it is worth noting that these percentages may not reflect the error rates in proxy voting advice, as the fact that a registrant raises a dispute regarding proxy voting advice in a supplemental filing does not necessarily indicate that an error exists in such advice"); 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.").

[10] See, e.g., Council of Institutional Investors, Leading Investor Group Dismayed by SEC Proxy Advice Rules (Jul. 22,

2020) ("[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."); US SIF, US SIF Releases Statement On SEC Vote To Regulate Proxy Advisory Firms (Jul. 22, 2020) ("Today's vote is a blow to the independence of research provided by proxy advisors to investors. The proxy advisor rule shifts power to corporate management and away from investors by allowing corporations to inappropriately influence proxy voting advice and intimidate proxy advisors with the threat of litigation.").

[11] 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"). See also Disclosure of Payments by Resource Extraction Issuers, Final Rule, Release No. 34--90679 (Dec. 16, 2020) (reversing course on a host of provisions recently adopted by the Commission, when, by the Commission's own reasoning in the adopting release, such reversals were not necessary under the Congressional Review Act disapproval of the recently adopted rule); Allison Herren Lee, Statement on Rules Governing the Disclosure of Payments by Resource Extraction Issuers (Dec. 16, 2020) ("The adopting release contends that the change in project definition alone would satisfy the CRA. Nevertheless the final rule reverses course on a host of other significant features of the 2016 rule, all of which will reduce transparency. These changes will reduce the number of companies required to disclose, reduce the amount of disclosure, reduce the liability that attaches to the disclosure, and reduce the promptness of the disclosure. At proposal, these changes were premised on Congressional concerns about compliance costs and anti-competitive effects. But since we have abandoned that rationale - and the release reasons these changes are not required to satisfy the CRA - it is not clear that we have any reasonable basis for these additional reversals from the Commission's well-reasoned 2016 position.").

https://www.sec.gov/news/statement/peirce-statement-proxy-voting-advice-071322

Thank you, Mr. Chair. I appreciate the staff's diligence, graciousness, professionalism, and hard work throughout this rulemaking process. Staff's valuable time, however, could have been put to better use. For example, staff could have worked immediately on addressing outstanding issues around proxy plumbing and, in several years, on conducting a retrospective review of the 2020 Rules.[1] Instead, the request made of the staff was a difficult and pointless one-find a way to redo a freshly adopted rule without any new information to suggest that such a rewrite is warranted. I am sorry that I cannot support the resulting rule.[2]

When the Commission proposed these latest amendments nine months ago (the "Redo Proposal"),[3] nothing had changed since we adopted our 2020 Rules to justify repeal, so I voted no.[4] The feedback we received during this proposal's brief comment period confirmed my initial view.[5] As one of many commenters who were baffled by the "regulatory whiplash"[6] put it:

We find it difficult to understand the Commission's decision to propose amending the proxy solicitation exemption qualification requirements prior to having any data on their actual impact or cost. . . . It is not possible to conduct an economic or cost benefit analysis for a rule that has not gone into effect, and the decision to amend a finalized rule without such data may have the unintended consequence of establishing an undesirable precedent impacting regulatory stability going forward.[7]

I. Rules of the Road

Proxy advisors play a very important role in our markets. By providing research and voting recommendations, they assist investment advisers and institutional investors in making voting decisions about matters relating to the companies in which they invest. Proxy advisors, through the operation of sophisticated electronic voting platforms, also help their clients navigate the logistically challenging voting process. If a client wants, the proxy advisor will pre-populate the client's voting cards with voting recommendations and automatically submit the votes on behalf of the client.

While these offerings are user-friendly, they have potential pitfalls. Investment advisers who use these platforms have a fiduciary duty to exercise their voting authority in the best interest of their clients.[8] Although advisers can get help, they cannot outsource that responsibility to anyone, including proxy advisors. Moreover, given the widespread reliance on proxy advisors, automatic voting can have an outsized effect on vote outcomes at public companies. In short, proxy voting advice can be "market moving."[9]

Our 2020 Rules recognized the ability of proxy advisors to move client voting decisions and markets. The rules introduced some procedural protections around the provision of proxy advice, including "engagement policies," which were intended to ensure that proxy advisor's clients receive transparent, accurate, and complete information on which to make their voting decisions.[10] The Commission did not preclude proxy advisors from offering automatic voting features. Instead, it adopted guidance for investment advisers on how they can use such features consistent with their fiduciary duty (the "Robo-Voting Guidance").[11]

II. Off-Roading

Today, we are dumping most of the protections embodied in the 2020 Rules and all of those in the Robo-Voting Guidance, which will be entirely repealed.[12] As expressed in the Redo Proposal, the rationale for the Commission's change of heart-in addition to continued opposition by critics of the 2020 Rules-is that proxy advisors have engaged in a self-improvement campaign and miraculously have acquired the "market-based incentives" that were missing when the Commission adopted its 2020 Rules.[13]

Many commenters identified serious flaws in the Commission's stated rationale, including:

Given the concentration in the proxy voting advice market, proxy advisors have limited incentives to engage with public companies, particularly smaller ones, to correct errors.[14] Moreover, proxy advisors' amending their own research reports and changing their voting recommendations to correct earlier errors can be costly and bring reputational risk.[15]
The Commission should not assume that proxy advisors' current voluntary engagement practices, even if they are good, will continue. In fact, since the adoption of the 2020 Rules, one of the largest proxy advisors has trended toward engaging less often with issuers.[16]
One commenter provided a study identifying the potential persistence of errors in proxy advice.[17] The adopting release optimistically views the study as evidence "that registrants were able to identify those issues and respond using pre-existing mechanisms."[18] Whether anyone saw those responses prior to voting is another question. As one commenter pointed out, even if errors are rare, it is in everyone's best interest if "companies on the receiving end of a proxy firm's recommendations have an opportunity to respond to inaccurate or arguably misinterpreted data."[19]
The Commission received letters in support of the Redo Proposal as well. These letters did not include new information to justify the Commission's U-Turn. Instead, they reiterated concerns that commenters had raised during the prior rulemaking process. The Commission, responding to these concerns, adopted a tailored regulatory framework for proxy voting advice in its 2020 Rules.[20] The dearth of new evidence to support the Redo Proposal was not surprising given that the 2020 Rules addressing the application of the proxy rules to proxy voting advice businesses were on ice; last summer, staff publicly announced its intent not to recommend enforcement actions based on the 2020 Rules.[21]

III. Turning Back

Despite the weight of the comments received over the past few months favoring the Commission leaving intact its 2020 work,[22] we are undertaking this unnecessary PVAB Rehab-gutting the rules so that little of what we adopted less than two years ago remains. Sadly, the one piece of the existing rules I would have liked to change-the term Proxy Voting Advice Business, or "PVAB"-remains unscathed in the rewrite. We are forging ahead to adopt this recommendation as proposed-as if we had never heard commenters' concerns about the redo. In essence, the Commission, having pre-populated its voting card nine months ago, did not have much interest in the responses we received during the unnecessarily short comment period.[23]

Changing course so dramatically with so little justification does not bode well for the Commission. What credibility will we have as an independent agency if our regulations so drastically swerve from one year to the next? If we keep making U-turns like this one, people might start to wonder whether the GPS we are using is calibrated to respond to political rather than market signals.

Thank you.

[1] Exemptions from the Proxy Rules for Proxy Voting Advice, Exchange Act Release No. 34-89372, 85 Fed. Reg. 55082 (Sept. 3, 2020) [hereinafter "2020 Rules"] (adopting final rules for proxy voting advice businesses).

[2] See Proxy Voting Advice, Exchange Act Release No. 34-95266 (July 13, 2022), https://www.sec.gov/rules/final/2022/34-95266.pdf [hereinafter "Adopting Release"].

[3] See Proxy Voting Advice, Exchange Act Release No. 34-93595, 86 Fed. Reg. 67383 (Nov. 26, 2021) [hereinafter "Redo Proposal"].

[4] See Hester M. Peirce, Commissioner, SEC, Dissenting Statement on Proxy Voting Advice Proposal (Nov. 17, 2021), https://www.sec.gov/news/statement/peirce-proxy-advice-20211117.

[5] A majority of the comment letters received on the Redo Proposal were not supportive. Compare Adopting Release, supra note 2, at n.65 (citing a list of critics of the proposed rule), with n.40 (citing a list of supporting commenters). See also Comments on Proposed Rule: Proxy Voting Advice, SEC (Nov. 20, 2021), https://www.sec.gov/comments/s7-17-21/s71721.htm.

[6] Letter from John Endean, President, American Business Conference to Vanessa Countryman, Secretary, SEC (Dec. 23, 2021) at 3 (https://www.sec.gov/comments/s7-17-21/s71721-20110745-264610.pdf).

[7] Letter from Ani Huang, President and CEO, Center on Executive Compensation to Vanessa Countryman, Secretary, SEC (Dec. 23, 2021) at 1-2 (https://www.sec.gov/comments/s7-17-21/s71721-20110717-264594.pdf). See also Letter from the American Securities Association, et al. to Vanessa Countryman, Secretary, SEC (Dec. 23, 2021) at 2 (https://www.sec.gov/comments/s7-17-21/s71721-20110263-264518.pdf) ("the SEC decided to reverse the 2020 Reforms prior to the reforms even going into effect. It is impossible for the SEC to objectively judge the impact the reforms would have had in practice given the most significant provisions apply beginning with the 2022 proxy season.").

[8] Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Company Act Release No. IA-5325, 84 Fed. Reg. 47420, 47421 (Sept. 10, 2019) [hereinafter "Commission Guidance on Proxy Voting Responsibilities"] ("[F]or an investment adviser to form a reasonable belief that its voting determinations are in the best interest of the client, it should conduct an investigation reasonably designed to ensure that the voting determination is not based on materially inaccurate or incomplete information.").

[9] See 2020 Rules, supra note 1, at n.18 and associated text.

[10] Specifically, the rules granted an exemption for proxy advisors to the proxy solicitation rules, to the extent the proxy advisors: (1) prominently disclose material conflicts of interest to their clients along with any policies and procedures regarding how the firm addresses such conflicts 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, and (ii) proxy advisors' clients have a mechanism by which they can reasonably be expected to become aware of any written statements from those companies. See 17 C.F.R. § 240.14a-2(b)(9) (2021).

[11] Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Investment Advisers Act Release No. IA-5547, 85 Fed. Reg. 55155 (Sept. 3, 2020) [hereinafter "Robo-Voting Guidance"].

[12] See Adopting Release, supra note 2, at 41.

[13] See Redo Proposal, supra note 3, at 67386-88.

[14] See, e.g., Letter from Carlo Passeri, Senior Director of Capital Markets and Financial Services Policy, Biotechnology Innovation Organization to Vanessa Countryman, Secretary, SEC (Dec. 23, 2021) at 1-2 (https://www.sec.gov/comments/s7-17-21/s71721-20110739-264606.pdf); Letter from Benjamin Zycher, Senior Fellow, American Enterprise Institute to the SEC (Oct. 14, 2021) at 3 (https://www.sec.gov/comments/s7-17-21/s71721-20110748-264612.pdf); Letter from Tom Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce to Vanessa Countryman, Secretary, SEC (Dec. 23, 2021) at 4 (https://www.sec.gov/comments/s7-17-21/s71721-20110258-264516.pdf).

[15] See e.g., Huang, supra note 7, at 7-8.

[16] See Quaadman, supra note 14; Huang, supra note 7; Letter from John A. Zecca, Executive Vice President, Chief Legal and Regulatory Officer, Nasdaq, Inc. to Vanessa Countryman, Secretary, SEC (Dec. 27, 2021) (https://www.sec.gov/comments/s7-17-21/s71721-20110818-264663.pdf); Letter from Ted Allen, Vice President, Policy & Advocacy, Society for Corporate Governance and Darla Stuckey, President and CEO, Society for Corporate Governance to Vanessa A. Countryman, Secretary, SEC (Dec. 30, 2021) (https://www.sec.gov/comments/s7-17-21/s71721-20111068-264733.pdf). See also ISS, FAQs regarding ISS Proxy Research, ISS Governance, https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920 (last visited July 12, 2022) ("In the US, as from January 2021, drafts are no longer provided to U.S. companies including those in the S&P 500 index."). The Adopting Release takes comfort in the fact that "ISS continues to allow any registrant to request a copy of its proxy voting advice issued under its Benchmark policy guidelines free of charge after ISS has disseminated the advice to its clients." Adopting Release, supra note 1, at n.142. See ISS, FAQs regarding ISS Proxy Research, ISS Governance, https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276741161-7ca718d3-32ae (last visited July 12, 2022). The rule the Commission is adopting today is agnostic about whether that practice continues.

[17] Letter from Kyle Isakower, Senior Vice President of Regulatory and Energy Policy, The American Council on Capital Formation to Vanessa Countryman, Secretary, SEC (Dec. 22, 2021) (https://www.sec.gov/comments/s7-17-21/s71721-20110241-264511.pdf) (detailing the findings of a study in which there were 50 instances where proxy advisors have formulated recommendations based on data or analysis disputed by the companies themselves, an increase from the 42 instances detailed in a 2020 analysis).

[18] Adopting Release, supra note 2, at 33.

[19] Letter from Michelle Nellenbach, Vice President of Strategic Initiatives, Bipartisan Policy Center to Vanessa Countryman, Secretary, SEC (Dec. 27, 2021) at 5 (https://www.sec.gov/comments/s7-17-21/s71721-20111188-264840.pdf).

[20] See 2020 Rules, supra note 1. The 2020 Rules were based primarily on feedback from the Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Exchange Act Release No. 34-87457, 84 Fed. Reg. 66518 (Dec. 4, 2019) [hereinafter, "2019 Proposed Rules"] (addressing obligations of those businesses that provide proxy voting advice, including to investment advisers). Additional sources of comment were also considered in the 2020 Rules, including: Comments on Statement Announcing SEC Staff Roundtable on the Proxy Process, SEC (Nov. 15, 2018), https://www.sec.gov/comments/4-725/4-725.htm; Comments on Proxy Voting Roundtable, SEC (Feb. 19, 2015), https://www.sec.gov/comments/4-681/4-681.shtml; Comments on Proxy Advisory Firm Roundtable, SEC (Dec. 5, 2013), https://www.sec.gov/comments/4-670/4-670.shtml; Comments on Concept Release on the U.S. Proxy System, SEC (July 14, 2010), https://www.sec.gov/comments/s7-14-10/s71410.shtml.

[21] See 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, SEC (June 1, 2021), https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01 ("At the direction of the Chair, we are now considering whether to recommend that the Commission revisit the 2019 Interpretation and Guidance and the 2020 Rule Amendments. In light of this direction, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area."). See also Gary Gensler, Chair, SEC, 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; Hester M. Peirce, Commissioner, SEC and Elad L. Roisman, Commissioner, SEC, 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.

[22] See supra note 5.

[23] See, e.g., Letter from J.W. Verret, Professor, George Mason University Antonin Scalia Law School to Vanessa Countryman, Secretary, SEC (Dec. 21, 2021) at 12 (https://www.sec.gov/comments/s7-17-21/s71721-20110192-264452.pdf) (arguing that comment period should have matched comment period for 2020 rules)

Statement on Final Rule Amendments on Proxy Voting Advice by SEC Commissioner Mark T. Uyeda (SEC Release)
https://www.sec.gov/news/statement/uyeda-statement-amendments-proxy-voting-advice-071322

Thank you, Chair Gensler. Today, we are considering an amendment to the rules governing the practices of businesses providing proxy voting advice.

I want to acknowledge the efforts of the staff in the Divisions of Corporation Finance, Investment Management, and Economic and Risk Analysis and the Office of the General Counsel. I appreciate the briefings and assistance during the past two weeks to ensure that my office had the resources and materials required to evaluate the rule and its corresponding impacts in a short amount of time.

However, I remain perplexed as to why the Commission is taking this action and what changed during the roughly ten months between the adoption of the 2020 amendments to the proxy rules[1] and the subsequent announcement that the SEC would be revisiting these rules.[2] I have concerns that this regulatory seesaw does not reflect administrative "best practices" that promote long term reliance and confidence by market participants in the stability of important areas of securities regulation.

For this and other reasons, I am unable to support today's recommendation.

Proxy Voting Advice is Largely Driven by Compliance Needs

Before discussing my substantive and procedural concerns with this rule, it is worth considering why the business of proxy voting advice came about. Its origins lie in concerns among asset managers, starting in the 1980s, that they had a fiduciary obligation to vote every proxy.

Part of this belief can be traced to guidance from a mid-level Department of Labor official in a 1988 letter about proxy voting rights being a "plan asset" to which fiduciary duties attached under the Employee Retirement Income Security Act.[3] This guidance was not subject to notice or public comment. Similar views with respect to proxy voting were subsequently expressed for fiduciary duties under the Investment Advisers Act.[4]

While the Commission has never taken the position that a fiduciary must vote every proxy - indeed, it has repeatedly stated that there may be times when an investment adviser may refrain from voting a proxy if it determines that refraining is in the best interest of the client[5] - there remains a sense within the asset management industry that the safest course is simply to vote all proxies.

In this respect, proxy voting by asset managers has been largely transformed into a compliance process - not only for the proxy vote itself but also the mechanics of submitting the vote and the compilation and reporting of proxy votes, such as on Form N-PX. As noted in the release, proxy voting advice businesses are often retained not only to provide vote recommendations, but also to assist with "other aspects of the voting process, which for certain investment advisers has become increasingly complex and demanding over time."[6]

Asset managers - recognizing proxy voting as a compliance risk - have sought to address these obligations by hiring proxy voting advice businesses[7] to conduct the analysis and provide voting recommendations. Some asset managers have functionally outsourced these responsibilities, as reviewing potentially hundreds or more proxy statements during a compressed timeframe known as "proxy season" is costly and impracticable. Proxy voting advice businesses are designed to provide a solution to this problem at a lower cost.

Because of the seasonal nature of the business, I have concerns about the quality of proxy voting recommendations as they pertain to small- and mid-size issuers that are outside the Standard & Poor's 500 Index. While on the Senate Banking Committee staff, I was part of conversations with these companies in which they complained that proxy voting advisory firms often make recommendations based off a checklist implemented by relatively inexperienced workers who do not fully understand complex corporate matters subject to proxy votes, and who cannot adequately focus on the circumstances of a specific company because "there are so many of them and so little time."

The Deletion of Note (e) in Rule 14a-9 Creates Unnecessary Confusion

This brings me to my first substantive concern about the rule. The SEC rulebook should say what the Commission means. The amendments would delete Note (e) in Rule 14a-9. Note (e) explains that, depending upon the particular facts and circumstances, the failure to disclose material information regarding proxy voting advice, such as the proxy voting advice business' methodology, sources of information, or conflicts of interest, may be misleading.

However, the deletion of Note (e) fails to provide regulatory clarity. To the contrary, the language from former Note (e) is now included in the preamble of the adopting release.

What is the purpose of deleting Note (e) and what is the Commission attempting to convey by placing it in the preamble? I can think of at least four possible answers:
  • Answer 1: Note (e) applies - in which case the language should remain in the rule text where it currently is.
  • Answer 2: Note (e) does not apply - in which case the language should be removed completely.
  • Answer 3: Note (e) does not apply, but to avoid suggesting that potentially false and misleading statements are permissible, a largely unenforceable explanation in the preamble will state that nothing has changed.
  • Answer 4: None of the above.

It is unclear to me which answer is the correct one. Promoting a transparent and straightforward regulatory standard is particularly important given the complexities surrounding the subject matter. Key standards underpinning an area of regulation should be, to the extent practical, placed in the rule text. Accordingly, if the framework and substance of Note (e) is affirmed by the Commission, it should be placed in the plain text of the rule, rather than in the accompanying preamble.

The Comment Period was Needlessly Compressed

Procedurally, the 30-day comment period for the proposal was insufficient under the circumstances. The proposal sought to re-visit complex questions that had been thoughtfully addressed by the Commission during an extensive rulemaking process during which the public had three months to submit comments.

The 30-day comment period also stands in contrast to executive orders issued by the administrations of President Clinton, President Obama, and President Biden, all of which recognized the importance of a 60-day comment period.[8] A 60-day comment period is also endorsed by the Administrative Conference of the United States for significant regulatory actions.[9]

The Commission proposed these amendments on November 18, 2021 and comments were due by December 27 of that year.[10] This period overlapped with major holidays, including Thanksgiving, Christmas, Hanukkah, and the beginning of Kwanzaa. More importantly, the comment deadline fell during the first holiday season since the rollout of COVID vaccines, which allowed families to gather in person safely for the first time in nearly two years.

Moreover, the 2020 amendments were intended to benefit public companies. The SEC's December 27th deadline, however, came at a time when many public companies with calendar year-end fiscal years were in the midst of preparing and auditing their financial statements. It was not an opportune time to be evaluating the proposal and drafting comment letters to the Commission.

The short comment period likely deterred some interested persons from submitting comment letters. It may have also resulted in the Commission only seeing a narrower picture of the public concerns and failing to capture relevant data and perspectives.

Voluntary Standards and Market-Based Incentives Can Be Effective

Notwithstanding these concerns, there are portions of today's release that I find agreement with. Specifically, the release acknowledges that "[t]he potential cost associated with the amendments may be mitigated, however, by the practices and standards that [proxy voting advice businesses] have voluntarily adopted to help improve the basis of their proxy voting advice."[11] The release continues by stating that "[m]oreover, because PVABs voluntarily adopted these practices, we believe that they are less likely to adversely affect the independence, cost, and timeliness of proxy voting advice than any additional measures" required by the prior SEC rules that are being rescinded.[12] Finally, the release notes that "we agree with the commenters that asserted that PVABs have market-based incentives to maintain these practices."[13]

These reasons are being used to justify the removal of conditions designed to protect investors and maintain market integrity in proxy voting. Given that the Commission believes and emphasizes that these voluntary measures and market-based incentives are effective and sufficient, I hope that moving forward the Commission will apply this reasoning and consider similar alternatives in lieu of prescriptive public company disclosure requirements.

Thank you and I have no questions.

[1] Exemptions from the Proxy Rules for Proxy Voting Advice, Release No. 34-89372 (July 22, 2020) [85 FR 55082 (Sept. 3, 2020)], available at https://www.federalregister.gov/documents/2020/09/03/2020-16337/exemptions-from-the-proxy-rules-for-proxy-voting-advice.

[2] Chair Gary Gensler, Statement on the Application of the Proxy Rules to Proxy Voting Advice (June 1, 2021), available at https://www.sec.gov/news/public-statement/gensler-proxy-2021-06-01.

[3] Letter to Helmuth Fandl, Chairman of the Retirement Board, Avon Products, Inc., 1988 WL 897696 (Feb. 23, 1988).

[4] See generally Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019) [84 FR 47420 (Sept. 10, 2019)] ("Interpretive Release"), available at https://www.federalregister.gov/documents/2019/09/10/2019-18342/commission-guidance-regarding-proxy-voting-responsibilities-of-investment-advisers.

[5] Id. at 47426 (Question 6).

[6] Proxy Voting Advice, Release No. 34-95266 (July 13, 2022), at 7 n. 6 (2022 Final Rule).

[7] Referred to in the 2022 Final Rule as proxy advisory firms, or proxy voting advice businesses ("PVABs"). See 2022 Final Rule, at 5.

[8] Executive Order 13563, Improving Regulation and Regulatory Review (Jan. 18, 2011) [76 Fed. Reg. 3821 (Jan. 21, 2011)]; see also Executive Order 12866, Regulatory Planning and Review (Sept. 30, 1993) [58 Fed. Reg. 51735 (Oct. 4, 1993)] ("each agency should afford the public a meaningful opportunity to comment on any proposed regulation, which in most cases should include a comment period of not less than 60 days"); Memorandum for the Heads of Executive Departments and Agencies, Modernizing Regulatory Review (Jan. 20, 2021) [86 Fed. Reg. 7223 (Jan. 26, 2021)] ("This memorandum reaffirms the basic principles set forth in [Executive Order 12866] and in Executive Order 13563 of January 18, 2011 (Improving Regulation and Regulatory Review), which took important steps towards modernizing the regulatory review process. When carried out properly, that process can help to advance regulatory policies that improve the lives of the American people.").

[9] See Administrative Conference of the United States, Rulemaking Comments, Recommendation No. 2011-2 (June

16, 2011), available at https://www.acus.gov/recommendation/rulemaking-comments.

[10] See Proxy Voting Advice, Release No. 34-93595 (Nov. 17, 2021) [86 FR 67383 (Nov. 26, 2021)] ("2021 Proposing Release").

[11] 2022 Final Rule, at 77.

[12] Id. at 78.

[13] Id.

https://www.sec.gov/news/press-release/2022-121
The SEC proposed amendments to Rule 14a-8. 
https://www.sec.gov/rules/proposed/2022/34-95267.pdf In part the SEC Release states that:

The proposed amendments to Rule 14a-8 would revise the following bases for exclusion:
  • Substantial Implementation. The proposed amendments would specify that a proposal may be excluded under this provision if the company has already implemented the "essential elements" of the proposal.
  • Duplication. The proposed amendments would specify that a proposal "substantially duplicates" another proposal previously submitted for the same shareholder meeting if it addresses the same subject matter and seeks the same objective by the same means.
  • Resubmission. The proposed amendments would provide that a proposal constitutes a resubmission if it substantially duplicates another proposal that was previously submitted for the same company's prior shareholder meetings. . . .

Improving the Shareholder Proposal Process: Statement on Proposed Amendments to Rule 14a-8 by SEC Commissioner Allison Herren Lee
https://www.sec.gov/news/statement/lee-statement-proposed-amendments-rule-14a-8-071322

Shareholder proposals represent a key mechanism for shareholders to engage with management, put issues of importance on the proxy ballot, and generally enhance oversight and accountability. Through this process, shareholders have introduced significant improvements in corporate governance including majority vote rules for the election of directors, elimination of staggered board terms, limits on poison pills that serve to entrench management, and requirements for independent board chairs. Indeed shareholder proposals have often been a catalyst for pivotal corporate governance reforms. And shareholder-proponents have been early and leading voices - bellwethers for management - on significant issues such as climate risk, workforce diversity, and political spending disclosure.

For all of these reasons, it is imperative that the substantive bases for excluding shareholder proposals from the ballot are not overbroad and create as balanced, predictable, and efficient a framework as possible.[1] Accordingly, I am pleased to support the amendments we propose to today, which would clarify the framework governing the inclusion or exclusion of shareholder proposals from the proxy ballot, and help ensure proponents have a fair opportunity to put appropriate proposals before their fellow shareholders.

In particular, the Commission proposes today to amend the provisions of Rule 14a-8 permitting exclusion on three different bases: that a proposal (1) has already been substantially implemented; (2) is duplicative of another current proposal, or (3) constitutes a resubmission of a prior proposal that failed to meet resubmission thresholds.

With respect to substantial implementation, the proposed amendment is intended to focus analysis on whether the essential elements of a proposal have been implemented - establishing a more objective and specific standard to enhance certainty for shareholders and companies alike.[2]

With respect to duplication and resubmission, the proposed amendments would align and narrow these bases for exclusion to circumstances where proposals address the same subject matter and seek the same objective by the same means, thereby facilitating the ability of shareholders to put forth various differing approaches to achieving their objectives.[3] Just as management endeavors to be innovative and creative in driving value and seeking solutions, shareholders too can add value by generating ideas for different approaches to an issue.

The proposed amendments are tailored and thoughtful revisions to Rule 14a-8 that, importantly, are carefully informed by the staff's experience applying the rule through the 14a-8 no-action process. Thus, I'm pleased to support this recommendation, and I want to thank staff in the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Office of the General Counsel for their work on this proposal, which as usual reflects their expertise and attention to detail. Thank you.

[1] See Amendments to Rules on Shareholder Proposals, Release No. 34-40018 (May 21, 1998) (describing revisions to 14a-8 as an effort to make the framework as "fair, predictable, and efficient" as possible).

[2] See Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Proposed Rule, Release No. 34-[x] (July 13, 2022) ("We believe that an analysis that focuses on the specific elements of a proposal would provide a reliable indication of whether the actions taken to implement a proposal are sufficiently responsive to the proposal such that it has been substantially implemented. . . We believe that the proposed amendment would facilitate shareholder suffrage, provide a more objective and specific framework for the substantial implementation exclusion, assist the staff in more efficiently reviewing and responding to no‑action requests, and benefit shareholders and companies by promoting more consistent and predictable determinations.") [Adopting Release].

[3] See Adopting Release at 20-21 (describing the proposed amendment to the duplication provision, which is consistent with the proposed approach to the resubmission provision, saying "the proposed amendment would enable the consideration by a company's shareholders of later-received proposals that may be similar to and/or address the same subject matter as an earlier-received proposal but which seek different objectives or offer different means of addressing the same matter.").

In the past, corporate democracy was traditionally exercised in-person at an annual meeting. At these meetings, company shareholders gathered together physically, in a room, to cast their votes on a variety of issues ranging from the election of directors to employee working conditions.[1] Today, with two years of COVID telework and remote technology under our belt, that may seem as antiquated as my parents' landline rotary phone. The majority of shareholders now vote through the grant of proxy in advance of the meeting, electronically. In other words, they fill out a ballot, or someone, like their investment adviser, does so on their behalf through an electronic vote management system.[2] This process, as a whole, is generally referred to as the proxy process and, over time, the corporation's proxy materials have become, as the D.C. Circuit acknowledged, "the forum for shareholder suffrage."[3]

Shareholder voting is one of few avenues for investors to exercise their voices within a corporation.[4] The shareholder vote is a right granted in return for the investor's capital.[5] But it is not unfettered. The right to vote on corporate affairs is limited to certain matters by state corporate law. Further, the right of shareholders to vote is balanced against the authority of the board of directors to make decisions about the management of the enterprise, which the board then delegates to the executive officers.[6] Regulation of the proxy process is a core function of the Commission under the Securities Exchange Act of 1934,[7] and part and parcel of the SEC's responsibilities.

With that in mind, the federal proxy rules were drafted to ensure that state law shareholder rights are accessible and meaningful when those rights are exercised by proxy.[8] In this regard, we must remain constantly vigilant and must continuously evaluate whether the proxy system as it has evolved remains effective in ensuring these shareholder rights.[9] For example, the SEC made an important stride last year by finalizing the universal proxy rule.[10] Now, shareholders may more easily vote for a mix of board candidates, more closely approximating direct shareholder voting at an annual meeting.[11]

This proxy infrastructure seems fairly straightforward and seemingly simply to effect. In practice, however, complexities abound. In line with modern portfolio theory, many shareholders have diversified holdings, with ownership spread across many issuers rather than concentrated in a few individual stocks. The growth of index funds, and of the intermediation of equity holdings through institutional investors, for example, adds layers of complexity very quickly. Each proxy season, these institutional investors vote shares across thousands of issuers on a significant number of matters on behalf of their clients - resulting, some years, in over 7.5 million votes.[12] In order to manage this volume of voting, investors often hire companies, called proxy advisory firms, to help provide research, analysis, recommendations, and logistical support for the matters that appear on a given corporation's proxy. And it's no wonder. Academic research has shown that given such dispersed ownership, monitoring public companies from the outside is difficult, resource-intensive,[13] and the incentives to engage in meaningful oversight for many shareholders are reduced by competing considerations.[14]

But such monitoring and oversight are vital. Notably, shareholder proponents - those putting forward proposals - have used the shareholder proposals submitted in proxy materials to limit mechanisms that insulated boards and management.[15] Through proposals, corporate governance hygiene in the form of board declassification and term limits have become commonplace.[16]

The term corporate democracy and this proxy history are all part of an important and delicate balance. A balance that implicates shareholder rights granted through state laws which are vindicated through a federal scheme, a balance between corporate directors and the owners (shareholders) who have invested their capital into the corporation, and a balance of the practical realities of today's world. Congress entrusted the Commission with authority to promote fair, honest, and informed markets, underpinned by a properly functioning proxy system devised by federal law and regulation - the forum for shareholder suffrage.[17] It is unreasonable to expect shareholders' voices to be heard over a rotary phone. And as we have evolved with our telecommunications devices (most of us anyway), the Commission must evolve with the increasing sophistication, complexity, and intermediation of the securities markets. It is essential for the Commission to re-assess from time to time whether corporate democracy is in balance.

Proxy Voting Advice Adoption

Having conducted that assessment, today we are adopting amendments to the federal proxy rules governing voting advice. This advice, as noted above, is a foundational part of the proxy ecosystem. The steps we take today will help ensure that proxy voting advice remains independent and can flow to the investors who rely on it to inform their voting. Today's release is responsive to feedback from the intended beneficiaries of a rule promulgated in 2020, who have stated, clearly, that changes made at that time would impede both the independence and timeliness of proxy voting advice. The data and evidence gathered by the Commission over the years also indicates that risks posed by the 2020 rule in terms of costs, timeliness, and a sacrifice of independence, quite simply, exceed the benefits of that rule.[18]

Moreover, the 2020 changes sought to ensure the accuracy of proxy voting advice. That goal is a good one. But the Commission's own data show that the amendments implemented to achieve that goal were, in fact, unnecessary. The rate of factual errors in proxy voting advice was vanishingly small, less than two percent.[19] The rule as adopted introduced real and costly risks to address a problem that was marginal, at best. As a result, the Commission is taking important and measured steps today to continue to assess and promote an appropriate balance in corporate democracy and shareholder voting.

I want to thank the commenters for their input, without which, we could not make improvements.

Proposed Amendments to 14a-8

Relatedly, shareholder proposals go to the foundational arrangement of corporations: a separation of ownership and control. Shareholders invest their capital into the corporation, and the board of directors is responsible for managing the affairs of the corporation and deploying that shareholder capital. The board of directors then delegates this authority to officers, such as the CEO and CFO, while retaining responsibility for their oversight.

As part of this separation of ownership and control, shareholders have some opportunity, as I mentioned above, to put proposals to a shareholder vote, and include such proposals in company proxy materials alongside the company's own proposals.[20] But, as I also noted, there are limitations to those opportunities. Rules - both procedural and substantive - govern when a proposal can be put on the proverbial ballot, or proxy material, for a vote. When it comes to shareholder proposals on the corporation's proxy materials, these rules come, in large part, in the form of Exchange Act Rule 14a-8, which governs both the ability to submit and include a proposal in the proxy materials and the ability of management to exclude certain proposals.

The benefits of 14a-8 shareholder proposals and the interactions that flow from the process have been many and meaningful.[21] Keeping this avenue of communication and transparency robust, healthy, and effective, for both the shareholder franchise and management, is critical to the balance of corporate democracy, and is an important function of the SEC. But over time, as the Commission has worked year-after-year with issuers and proponents on this framework, proposal after proposal, observers have expressed concern about variation and potential unpredictability in the application of some exclusions.[22] Today's rule seeks to clarify that framework, and in so doing, "facilitate[s] shareholder suffrage and communication between shareholders and the companies they own on important issues."[23] This modernization, in combination with the release language, seeks to provide transparency and predictability in how the principles under certain 14a-8 exclusions are applied and, in turn, help ensure that all proposals that ought to be put to a shareholder vote will be.

I look forward to the reviewing the comment file, to meeting with the relevant stakeholders, and moving forward to continuing to assess and modernize our rules as appropriate.

Thank you to the staff in the Division of Corporation Finance, Division of Economic and Risk Analysis, Office of the General Counsel, and Division of Investment Management. I appreciate the continued engagement with my office and for your constant support of investors and the markets.

[1] See, e.g., Sara Haan, Corporate Governance and the Feminization of Capital, 74 Stan. L. Rev. 515, n. 175 (2022).

[2] See, e.g., Sec. & Exch. Comm'n, Briefing Paper: Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007) [hereinafter Proxy Briefing Paper].

[3] See Concept Release on the U.S. Proxy System (July 14, 2010) (citing Roosevelt v. E.I duPont de Nemours & Co., 958 F.2d 416, 422 (D.C. Cir. 1992)).

[4] Other ways include direct engagement, activist campaigns, and independent proxy campaigns.

[5] Beyond the state law enumeration on matters suitable for shareholder vote, academics and observers have identified practical and structural impediments to shareholder voice within a corporation. See, e.g., J. Robert Brown, The Proxy Rules and Restrictions on Shareholder Voting Rights, 46 Seton Hall L. Rev. 45 (2016) (describing the hurdles and difficulties in using the 14a-8 process); Lisa Fairfax, Making the Corporation Safe for Shareholder Democracy, 69 Ohio St. L. J. 53, 61-78 (2008) (describing how shareholders have overcome certain mechanisms tha previously reduced shareholder voice within a corporation).

[6] See Proxy Briefing Paper.

[7] See Section 14(a) of the Securities Exchange Act of 1934, Exchange Act Rule 14a-8.

[8] See, e.g., Renee Jones, Sec. & Exch. Comm'n, The Shareholder Proposal Rule: A Cornerstone of Corporate Democracy (Mar. 8, 2022).

[9] The system could use updates to keep pace with the changing markets, and the Commission is woefully behind. The proxy plumbing process, though it works, is as up-to-date and tailored to modern needs as my parent's landline, rotary phone! See Caroline Crenshaw, Sec. & Exch. Comm'n, Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 at n. 27, 28 & accompanying text (Sept. 23, 2020).

[10] SeeUniversal Proxy, Release No. 34-79164 (proposed Oct. 26, 2016) (amending relevant Exchange Act rules to allow for universal proxy cards that include the names of all director candidates, issuer candidates and challengers, allowing shareholders to more practically vote for a mix of issuer and challenger director candidates instead of having to vote either the full issuer slate or full challenger slate). See also SEC Investor Advisory Committee, 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").

[11] See supra note 10.

[12] See Amendments to Exemptions from Proxy Rules for Proxy Voting Advice, Release No. 34-89372 at n.8 (proposed Nov. 5, 2019) (citing Morris Mitler et al., Funds and Proxy Voting: The Mix of Proposals Matters, Investment Company Institute (Nov. 5, 2018) ("For funds, voting proxies is no small job. In the 2017 proxy season, funds cast 7.6 million votes on 25,859 proposals on corporate proxy ballots.")).

[13] See J. Robert Brown, The Evolving Role of Rule 14a-8 in the Corporate Governance Process, 93 Denv. L. Rev. F. 151 (detailing the substantive bases for exclusion under Rule 14a-8, describing many pro-issuer restrictions and limitations, and detailing the hurdles which shareholder proponents have had to overcome); Lucian Bebchuk, The Case for Increasing Shareholder Power,118 Harv. L. R. 833, 851 (2005) (noting the agency costs between management and shareholders in publicly dispersed companies as excessive pay self-dealing, rejection of beneficial acquisition offers, over-investment and engagement in empire-building and agreeing for increased shareholder input on governance arrangements.); John Coffee, Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 Colum. L. Rev. 1277, 1281 (1991) (arguing that institutional investors may be "rationally apathetic" when it comes to corporate governance because there is trade-off between liquidity and control so investors that want liquidity hesitate to accept control).

[14] See Coffee, supra note 13.

[15] See, e.g., Kosmas Papadopoulos, ISS Analytics, The Long View: The Role of Shareholder Proposals in Shaping U.S. Corporate Governance (2000-2018), Harv. L. Sch. F. Corp. Gov. (Feb. 6, 2019); Lisa Fairfax, Making the Corporation Safe for Shareholder Democracy, 69 Ohio St. L. J. 53, 61-78 (2008); Lucian Bebchuk, The Myth of the Shareholder Franchise, 93 Va. L. Rev. 675, 688-694 (2013).

[16] See supra note 15.

[17] See Amendments to Exemptions from Proxy Rules for Proxy Voting Advice, Release No. 34-89372 at 6 (proposed Nov. 5, 2019) ("Proxies are the means by which most shareholders of publicly traded companies exercise their right to vote on corporate matters. Congress vested in the Commission the broad authority to oversee the proxy solicitation process when it originally enacted the Exchange Act in 1934. 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, the Commission's interest in ensuring fair, honest and informed markets, underpinned by a properly functioning proxy system, dictates that we regularly assess whether the system is serving investors as it should.")

[18] See, e.g., Concept Release on the U.S. Proxy System (July 14, 2010); Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 2018); SEC Investor Advisory Committee, Recommendation Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020); Proxy Voting Advice, Release Nos. 34-95266, IA-6068 at n. 127 (adopted July 13, 2022) [hereinafter Adopting Release].

[19] See SEC Investor Advisory Committee, Recommendation Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals at 5, n. 16 (Jan. 24, 2020) (citing the Commission's own data that managers only filed supplemental proxy statemts claiming errors in proxy advisor reports 1.5% of the time across a three period and over 17,000 proxy statements). See also Adopting Release at n. 127.

[20] Such proposals are typically advisory and non-binding because under the laws of most states, shareholders do not have the power to require the board to take action, and a binding proposal may be excludable under the substantive basis of exclusion that proposals cannot be "improper under state law" or "violate state law." See, e.g., Sanford Lewis, Shareholder Rights Group, Analysis and Recommendations on Shareholder Proposal Decision-Making under the SEC No-Action Process, Harv. L. Sch. F. Corp. Gov. (Jul. 26, 2018); Latham & Watkins, M&A Deal Commentary (Aug. 1, 2006). See also Adrien K. Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7), 93 Den. L. Rev. F. 183, 183 (2016) ("Shareholders of a publicly traded company have the right under Rule 14a-8 (the Rule) to include their proposals in the company's proxy materials. The presence of thirteen substantive grounds for omitting a proposal, however, limits this authority.").

[21] See supra note 15.

[22] See Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Release No. 34 -95267, IC-34647 at n. 35, 18, 27 (proposed July 13, 2022) [hereinafter Proposing Release].

[23] See Proposing Release at 6. More specifically, the release would enhance the shareholder proposal process through amendments to three of the thirteen bases of exclusion that a company may cite to exclude shareholder proposals from its proxy materials. See id at Section II.A-C.

https://www.sec.gov/news/statement/peirce-statement-shareholder-proposals-proposal-071322

Introduction
Thank you, Mr. Chair. As you just heard, this recommendation[1] concerns Exchange Act Rule 14a-8, the rule that governs when public companies must include shareholder proposals in their proxy statements. We last amended this rule less than two years ago[2] and have yet to experience a full proxy season with these changes in effect. The September 2020 amendments recalibrated the rule to balance the benefit of allowing shareholder proposals to be included in a company's proxy materials with the reality that consideration of such proposals consumes company and shareholder resources.

I cannot support today's plan to upset that careful calibration by narrowing companies' ability to exclude proposals that they have substantially implemented, are duplicative of other proposals, or are resubmissions of prior failed proposals. A better approach would be for the Commission to allow sufficient time to see how our 2020 rules operate, and then review the results to determine whether further changes are appropriate.

The Proposing Release speaks in dramatic terms of "shareholder suffrage,"[3] but shareholders' ability to vote in corporate elections is not at issue. Rather, the proposal we are considering is about whether shareholders have to vote on the same issues over and over again. The Proposing Release also speaks in pragmatic terms of reducing subjectivity in our shareholder proposal process.[4] That objective is commendable to ensure consistency over time and across different companies and proponents. The proposed amendments, however, introduce new terms for our staff to interpret and market participants to debate. Any new ambiguity is likely to be resolved in favor of favored shareholder-proponents, and any new clarity is likely to narrow the three exclusion categories. Let me briefly address each of the three bases for exclusion at issue in this proposal.

Rule 14a-8(i)(10) - Substantial Implementation
Under Rule 14a-8(i)(10), a company can exclude a shareholder proposal that "the company has already substantially implemented."[5] The release introduces a new test for assessing whether a company can exclude a proposal on this basis: whether or not "the company has already implemented the essential elements of the proposal."[6] What constitutes an "essential element" is not clear, but the release suggests that staff will defer to shareholder-proponents' assessment of which elements are essential; the Proposing Release explains that "[i]n determining the essential elements of a proposal, we anticipate that the degree of specificity of the proposal and of its stated primary objectives would guide the analysis."[7] The examples offered in the release describe as essential elements the ability to aggregate an unlimited number of shareholders' holdings in a proxy access proposal and board authorship in a reporting provision.[8] Another observer could easily conclude that these details are not at the heart of those proposals. Subjectivity lives on.

Rule 14a-8(i)(11) - Duplication
Rule 14a-8(i)(11) allows a company to exclude a proposal that substantially duplicates another proposal that will appear on the company's proxy card.[9] The Proposing Release explains that, in assessing whether a proposal substantially duplicates another, the staff historically has looked at whether a new proposal shares the same "principal focus" as an earlier submitted proposal.[10] The proposed new test will assess whether potentially duplicative proposals "address[] the same subject matter and seek[] the same objective by the same means."[11] Clarity in this case seems to mean defanging the exclusion. Unless proposals are seeking exactly the same things, it seems that neither will be excludable as duplicative. The likely result - one the Proposing Release acknowledges - is multiple potentially overlapping or even conflicting proposals on the same topic on the same proxy.[12] Shareholder proponents, come one, come all!

Rule 14a-8(i)(12) - Resubmissions
Under Rule 14a-8(i)(12), a company may exclude from its materials a shareholder proposal that addresses "substantially the same subject matter as a proposal . . . previously included in the company's proxy materials within the preceding five calendar years" if the matter was voted on at least once in the last three years and received support below specified vote thresholds on the most recent vote.[13] When this basis for exclusion was first introduced, a company could exclude a proposal only if it was substantially the same as a prior proposal that had failed to gain the specified amount of support. Proponents easily were able to evade exclusion of their proposals by recasting the form of the proposal, expanding its coverage, or changing its language such that it was not identical to a prior proposal.[14] In 1983, the Commission, disavowing the strict interpretation of this exclusion, revised the rule so that a proposal would be excludable if it dealt with "substantially the same subject matter" as prior failed proposals.[15]

Nearly 40 years later, we seem to have forgotten the lessons that motivated the 1983 amendments. The new proposal would exclude only proposals that "substantially duplicate" prior failed proposals, and incorporate the same new test we propose to introduce for the duplication exclusion: does the new proposal address the same subject matter and seek the same objective by the same means? The Proposing Release explains that the existing "standard unduly constrains shareholder suffrage because of its potential ‘umbrella' effect - i.e., that it could be used to exclude proposals that have only a vague relation, or are not sufficiently similar, to earlier proposals that failed to receive the necessary shareholder support."[16] The proposed replacement test also suffers from another umbrella effect, i.e., that it will be used to shield shareholder proponents from the consequences of their failed votes. As with the duplication exclusion basis, the resubmission basis will not exclude any proposal unless it is nearly identical to a prior proposal. The shareholder proponents of today will seize on this new language to get around the resubmission limits just as their pre-1983 counterparts did with the "substantially the same proposal" standard in effect at that time.

A consideration of more recent Commission history only heightens concerns about this part of the proposal. The Commission's September 2020 amendments increased the levels of support a shareholder proposal must receive to be eligible for resubmission at the same company's future shareholders' meetings from 3, 6, and 10 percent to 5, 15, and 25 percent, depending on how many times the proposal has been put to a vote.[17] In conjunction with this change, as the Proposing Release acknowledges, the Commission specifically requested comment on whether it should change the resubmission exclusion basis or its application and, after considering the comments, declined to do so. As the Commission explained, the amended resubmission thresholds were designed to "lead to the submission of proposals that will evoke greater shareholder interest in, and foster more meaningful engagement between, management and shareholders, as the thresholds will incentivize shareholders to submit proposals on matters that resonate with a broader shareholder base to avoid exclusion under the rule."[18] A change in the wording or application of the exclusion to make it harder for companies to use would run directly counter to that objective.

We have not gone a full proxy season with these changes in effect, and already we are proposing rules that would directly undermine their purpose. If no two proposals will ever be judged duplicative under our standards, then no proposal would ever be deemed a "resubmission" at all. What is the purpose of resubmission thresholds?

Conclusion
I will conclude with a prediction: if this proposal is adopted, company proxy statements are likely to look like our rulemaking agenda-packed with items, many of which overlap with one another and rehash recently completed matters. I look forward to hearing whether commenters agree and would love to see evidence to the contrary. I am interested in hearing commenters' responses to the following questions, among others:

Would the proposed changes bring welcome clarity to companies and their shareholders?
Would companies decide, given the small chance that the staff will grant their requests under the new standards, to stop seeking no-action relief to exclude proposals? If so, in light of all the time our staff spends on shareholder proposal no-action requests, would this result be good?
How could we improve the proposal to ensure that these exclusions meet the Goldilocks test - excluding only the shareholder proposals that should be excluded?
The likelihood of receiving thoughtful comments in response to these questions and the many others in the proposal is diminished by the Commission's continued unwillingness to afford adequate time for public comment. This proposal comes with a comment period of the later of thirty days from the date of publication in the Federal Register or sixty days from the date of website publication.[19] For a proposal weighing in at less than 100 pages and limited in scope, such a comment period might seem acceptable. It is still shorter than the standard comment period. Moreover, in the past few months, we also have asked public companies to provide feedback on potential new requirements for: disclosure of requirements for cybersecurity risk[20] and climate change,[21] clawbacks,[22] pay versus performance,[23] and 10b5-1 plans.[24] Investment advisers and investment companies have been asked to comment on all of these as well as: ESG rules,[25] naming requirements for funds,[26] cybersecurity risk management,[27] and more.[28] Viewed in this light, formulating comments on this proposal in the next sixty days seems like a much more daunting task.

In closing, I want to thank the staff in the Divisions of Corporation Finance and Risk and Economic Analysis and the Office of General Counsel and other offices throughout the Commission. In particular, I want to thank Kasey Robinson, who worked so hard on this rulemaking and expertly guided me through a series of before and after hypotheticals.

[1] Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Exchange Act Release No. 34-95267 (July 13, 2022) (https://www.sec.gov/rules/proposed/2022/34-95267.pdf) [hereinafter "Proposing Release"].

[2] Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8, Exchange Act Release No. 34-89964 (Sept. 23, 2020), 85 Fed. Reg. 70240 (Nov. 4, 2020) [hereinafter "2020 Adopting Release"].

[3] Proposing Release, supra note 1, at 6.

[4] Proposing Release, supra note 1, at 6-7.

[5] 17 CFR § 240.14a-8(i)(10).

[6] Proposing Release, supra note 1, at 14.

[7] Id. at 14.

[8] Id. at 15-16.

[9] 17 CFR § 240.14a-8(i)(11).

[10] Proposing Release, supra note 1, at 17.

[11] Id. at 19.

[12] Id. at 20.

[13] 17 CFR § 240.14a-8(i)(12).

[14] See Proposed Amendments to Rule 14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by Security Holders, Release No. 34-19135 (Oct. 14, 1982), 47 Fed. Reg. 47420, 47429 (Oct. 26, 1982).

[15] See Proposing Release, supra note 1, at 24.

[16] Id. at 27.

[17] See 2020 Adopting Release, supra note 2, at 70288.

[18] Id. at 70259.

[19] Proposing Release, supra note 1, at 1.

[20] Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Exchange Act Release Nos. 33-11038, 34-94382, 87 Fed. Reg. 16590 (Mar. 23, 2022).

[21] The Enhancement and Standardization of Climate-Related Disclosures for Investors, Exchange Act Release No. 34-94478, 87 Fed. Reg. 21334 (Apr. 11, 2022).

[22] Reopening of Comment Period for Listing Standards for Recovery of Erroneously Awarded Compensation, Exchange Act Release No. 34-95057, 87 Fed. Reg. 35938 (June 14, 2022).

[23] Reopening of Comment Period for Pay Versus Performance, Exchange Act Release No. 34-94074, 87 Fed. Reg. 5751 (Feb. 2, 2022).

[24] Rule 10b5-1 and Insider Trading, Exchange Act Release No. 34-93782, 87 Fed. Reg. 8686 (Feb. 15, 2022).

[25] Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Investment Advisers Act Release No. 34-94985, 87 Fed. Reg. 36654 (June 17, 2022).

[26] Investment Company Names, Investment Company Act Release No. 33-11067, 34-94981, 87 Fed. Reg. 36594 (June 17, 2022).

[27] Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies, Investment Advisers Act Release No. 33-11028, Investment Company Act Release No. 34-94197, 87 Fed. Reg. 13524 (Mar. 9, 2022).

[28] SEC Proposed Rules, SEC, https://www.sec.gov/rules/proposed.shtml (last visited July 13, 2022).

Thank you, Chair Gensler. The Rule[1] being discussed today was so recently amended[2] that the Commission has not had the chance to determine the effects of those changes.

It is not clear why the Commission needs to rush to change this Rule.[3] As the release notes "some effects of the 2020 amendments on the number of proposals submitted and included in companies' proxy statements may not yet be realized."[4] The release also acknowledges that "[b]ecause the 2022 proxy season is ongoing . . . the information on the current practices . . . is incomplete."[5] It begs the question - why not simply wait another 90 days to evaluate the data from the 2022 proxy season and then decide whether to proceed with a proposal?

Had the Commission done so, it would have found, at least according to one law firm, that in 2022, the number of shareholder proposals increased by 8% over 2021 and were the highest number of submissions since 2016.[6] Furthermore, there was a significant decrease in the number of excluded proposals - a dramatic decline to a 38% success rate in 2022, down from 71% in 2021 and 70% in 2020.[7]

The changes, if adopted, would further discourage issuers from attempting to seek exclusions of shareholder proposals because they have been substantially implemented or are duplicative of other proposals. They could also effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless.[8]

As discussed in the release, if a shareholder proposal merely tweaks an essential element, such as the subject matter, objective, or means, the duplication and resubmission exclusions would no longer apply.[9]

The proposal expresses concern that the existing exclusion standards "may unduly constrain shareholder suffrage by limiting the shareholder-proponents' ability to engage with the companies whose securities they own."[10] But it never considers how the relative ease of submitting a proposal can provide leverage to a special interest shareholder that is seeking particular undertakings, concessions, or other benefits from public companies in exchange for not making a proposal. The general lack of transparency surrounding engagement or stewardship meetings with individual asset managers or institutional shareholders means that the investing public may never know how companies altered their actions in response to a shareholder proposal, whether threatened or actual.

This lack of transparency stands in stark contrast to the Commission's concerns in the proposed regulation of private fund advisors. There, the Commission seeks to prohibit private funds "from providing preferential treatment to certain investors in a private fund, unless the adviser discloses such treatment to other current and prospective investors."[11] It appears to be inconsistent when, with respect to private offerings involving sophisticated institutional investors, the Commission seeks full transparency while allowing non-disclosure with respect to potentially private benefits involving public companies and retail investors.

Moreover, the proposal does not even attempt to ascertain whether it would add value to investors. It states that "[o]ur economic analysis does not speak to whether any particular shareholder proposal is value-enhancing, whether the proposed amendment would result in inclusion of value-enhancing proposals, or whether the proposed amendments would have a disproportionate effect on proposals that are more or less value-enhancing."[12] It also acknowledges the failure to gather data "to assess the likelihood of proponent behavior changes or quantify the potential increase in the number of proposals."[13]

Not only is it uncertain if this proposal is value-enhancing, but the economic analysis acknowledges that it will burden other shareholders with the "costs associated with their own consideration of a shareholder proposal"[14] and these costs can be significant.[15] Increasing the number of shareholder proposals may cause asset managers to rely even more on proxy voting advice, despite the action being taken today that may weaken the integrity of that advice.[16]

Finally, the proposal creates an uneven playing field for U.S. public companies. As the release points out, "the proposed amendment could have a greater effect on U.S. public companies relative to those that are not subject to the federal proxy rules, namely foreign companies and U.S. private companies."[17] We should not derive satisfaction from disadvantaging U.S. companies in favor of foreign ones.

Today's proposal, when combined with the staff guidance issued in November 2021 regarding the significant social policy exception to the ordinary business exclusion,[18] sends a message to public companies about shareholder proposals: don't bother trying to exclude them. It will become one more reason for not becoming a public company to begin with. For these reasons, I am unable to support the recommendation but I do appreciate the efforts of the staff from the Division of Corporation Finance, the Division of Economic and Risk Analysis, the Office of the General Counsel, the Division of Investment Management, and the Division of Enforcement.

[1] 17 C.F.R. § 240.14a-8.

[2] Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Release No. 34-89964 (Sept. 23, 2020), 85 FR 70240 (Nov. 4, 2020), available at https://www.federalregister.gov/documents/2020/11/04/2020-21580/procedural-requirements-and-resubmission-thresholds-under-exchange-act-rule-14a-8 (2020 Rule 14a-8 Amendments).

[3] Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Release No. 34-95267 (July 13, 2022), available at https://www.sec.gov/rules/proposed/2022/34-95267.pdf.

[4] Id. at 40, n. 98.

[5] Id. at 42.

[6] See Gibson, Dunn & Crutcher LLP, Shareholder Proposal Developments During the 2022 Proxy Season (July 11, 2022), available at https://www.gibsondunn.com/shareholder-proposal-developments-during-the-2022-proxy-season/.

[7] Id.

[8] The proposal also contains a statement that purports to "reaffirm" certain standards described by the Commission in 1998 for a wholly separate exclusion for proposals relating to ordinary business. Rule 14a-8 Proposal at 7, n. 14 and accompanying text. While there is no question that the Commission made such statements in the past, a reaffirmation constitutes a new decision by the Commission. Such a decision, in the glaring absence of any evidence, data, or economic analysis to support that reaffirmation, is arbitrary and capricious.

[9] Id. at 55 ("shareholder-proponents could draft a proposal to focus on these essential elements and in turn, increase the likelihood of this proposal appearing in a company's proxy statement"); id. at 60 ("a proponent could change the objective or the means of a previously submitted proposal about the same subject matter so as to allow for it to be considered an initial submission instead of a resubmission").

[10] Id. at 18.

[11] Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-5955 (Feb. 9, 2022), 87 FR 18886 (Mar. 24, 2022), available at https://www.federalregister.gov/documents/2022/03/24/2022-03212/private-fund-advisers-documentation-of-registered-investment-adviser-compliance-reviews.

[12] Rule 14a-8 Proposal, at 50.

[13] Id. at 58.

[14] Id. at 52.

[15] Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8, Release No. 34-89964 (Sep. 23, 2020), 85 FR 70240, 70267 (Nov. 4, 2020), available at https://www.federalregister.gov/documents/2020/11/04/2020-21580/procedural-requirements-and-resubmission-thresholds-under-exchange-act-rule-14a-8.

[16] See SEC Adopts Amendments to Proxy Rules Governing Proxy Voting Advice, Press Release No. 2022-120 (July 13, 2022), available at https://www.sec.gov/news/press-release/2022-120.

[17] Rule 14a-8 Proposal, at 63.

[18] See Division of Corporation Finance, Shareholder Proposals: Staff Legal Bulletin No. 14L (Nov. 3, 2021), available at https://www.sec.gov/corpfin/staff-legal-bulletin-14l-shareholder-proposals.

In a FINRA Arbitration Statement of Claim filed in September 2021, customer Claimant Bardavon Health Innovations L.L.C. asserted . . . asserted . . . um, geez, let's just turn to the FINRA Arbitration Award for the "Case Summary":

In the Statement of Claim, Claimant alleged that Respondent charged Claimant for fees for services purportedly performed despite not having performed any services for Claimant and when Respondent was told that its services would probably not be necessary. . .

Okay, lemme see here -- Claimant alleged that Respondent charged service fees. Also, Claimant alleged that Respondent never performed any services warranting the fees. Further, Respondent allegedly told Claimant that its services "probably" wouldn't be necessary. So . . . Respondent charged Claimant for fees for services not provided and which were supposedly not going to be necessary -- or so that's what Claimant alleges.  In fairness to Respondent, let's again turn to the FINRA Arbitration Award for the balance of the "Case Summary":

Unless specifically admitted in the Statement of Answer and Counterclaim, Respondent denied the allegations made in the Statement of Claim and asserted various affirmative defenses. In the Counterclaim, Respondent asserted the following cause of action: breach of contract. The cause of action related to allegations that the engagement letter between Claimant and Respondent was a valid and binding contract, the Respondent performed its obligations under the engagement letter, and Claimant breached the engagement letter by failing to pay fees including an advisory fee and transaction fee. 

In the Statement of Answer to Counterclaim, Claimant denied the allegations made in the Counterclaim and asserted various affirmative defenses 

Moving along here, Claimant sought a Declaratory Judgment:

finding that Respondent's engagement letter is vague, and therefore void and unenforceable; a declaratory judgment finding that Respondent's engagement letter fails to set forth essential terms in definite and certain form, and therefore void and unenforceable; a declaratory judgment finding that Respondent's engagement letter is vague and unenforceable because of frustration of purpose; a declaratory judgment finding that Respondent is not entitled to its claim for excessive fees; a declaratory judgment finding that Respondent is not entitled to its claimed fees; and such other and further relief as the Panel deems just and equitable. 

Summing up Claimant's claims: Respondent wants to get paid for services it said would not be needed and that weren't provided; and, further, the Engagement Letter governing the deal is vague, void, and unenforceable because it lacks "essential terms." Respondent disputed the allegations. At the FINRA Arbitration hearing, Claimant sought a finding of no fee being owed, or, in the alternative, only a $100,000 fee. In contrast, Respondent sought $2,849,999.28.

The Award: The FINRA Arbitration Panel denied Claimant's claims and found Bardavon Health liable to and ordered the company to pay to Respondent Spurrier Capital $1,600,000 in compensatory damages.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95247; Whistleblower Award Proc. File No. 2022-63)
https://www.sec.gov/rules/other/2022/34-95247.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[T]he CRS concluded that Enforcement staff had already opened the investigation that led to the Covered Action approximately four years before Claimant submitted his/her information, and that Claimant's information was otherwise vague, insubstantial, and did not warrant any further investigative efforts by the staff. The CRS also determined that the staff did not use any information from Claimant's submission. 

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95222; Whistleblower Award Proc. File No. 2022-62)
https://www.sec.gov/rules/other/2022/34-95222.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[T]he CRS concluded that Claimant's information did not either (1) cause the Commission to (a) commence an examination, open or reopen an investigation, or inquire into different conduct as part of a current Commission examination or investigation, and (b) thereafter bring an action based, in whole or in part, on conduct that was the subject of claimant's information, pursuant to Rule 21F-4(c)(1); or (2) significantly contribute to the success of a Commission judicial or administrative enforcement action under Rule 21F-4(c)(2) of the Exchange Act. The CRS determined that the investigation that led to the Covered Action was opened and pursued as a result of referrals from another regulatory agency (the "Other Agency"). The CRS also determined that Claimant's information did not significantly contribute to the Covered Action and consisted primarily of publicly available information, information already known to the staff, or information that was otherwise vague and unsubstantiated. 

The CRS also concluded that Claimant did not qualify for an award because Claimant's information was provided before July 21, 2010, the date of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), and thus did not constitute original information within the meaning of Section 21F(b)(l) of the Exchange Act and Rules 21F-3(a)(2) and 21F-4(b)(1)(iv) thereunder. The CRS determined that Claimant's whistleblower application was based on emails sent to the Commission and other agencies beginning in Redacted The record before the CRS demonstrated that Claimant's information provided to the Commission after July 21, 2010 was already known to the staff, publicly available, or contained general or vague allegations of wrongdoing that were unsubstantiated and did not lead to the success of the Covered Action under Rule 21F-4(c)(2) of the Exchange Act.

Order Determining Whistleblower Award Claims ('34 Act Release No. 34-95221; Whistleblower Award Proc. File No. 2022-61)
https://www.sec.gov/rules/other/2022/34-95221.pdf
The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending the denial of a Whistleblower Award to Claimant. The Commission ordered that CRS' recommendations be approved. The Order asserts that [Ed: footnote omitted]:

[R]ule 21F-9(a) requires a whistleblower to submit information through the Commission's online Tips, Complaint, or Referral ("TCR") portal, or by mailing or faxing a Form TCR to the Commission's Office of the Whistleblower. Claimant's whistleblower application stated that Claimant submitted information to the Commission by email on or about Redacted but Claimant did not cite to any specific TCR submission. The CRS concluded that Claimant did not submit any information pursuant to these procedures until Redacted 

The CRS also concluded that Claimant did not qualify for an award because Claimant did not provide information to the Commission that led to the successful enforcement of the Covered Action. The CRS concluded that none of the information submitted by Claimant either (1) caused the Commission to (a) commence an examination, open or reopen an investigation, or inquire into different conduct as part of a current Commission examination or investigation, and (b) thereafter bring an action based, in whole or in part, on conduct that was the subject of claimant's information, pursuant to Rule 21F-4(c)(1); or (2) significantly contributed to the success of a Commission judicial or administrative enforcement action under Rule 21F-4(c)(2) of the Exchange Act. The record demonstrated that Enforcement staff opened the investigation that led to the Covered Action (the "Investigation") on Redacted based upon a source other than the Claimant, that Claimant submitted his/her Form TCR almost three years after the Investigation was opened, and that staff responsible for the Investigation confirmed that Claimant's information was not used in the Investigation or the resulting litigated enforcement action in any way.

https://www.finra.org/sites/default/files/2022-07/kausar-awc-2022073741702.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Harris Kausar submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Harris Kausar was a non-registered fingerprint ("NRF") person in 2020 and then sought to become registered in 2021 with Barclays Capital Inc. In accordance with the terms of the AWC, FINRA imposed upon Kausar a Bar from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Kausar took the FINRA Series 79 Investment Banking Representative Exam on December 26, 2021. Kausar had been provided an accommodation to take the exam online rather than in person. Prior to beginning the examination, Kausar attested that he had read and would abide by the FINRA Rules of Conduct. These rules require candidates taking online examinations to store all personal items outside the room in which they take the exam, and prohibit any use, attempted use, or access to personal items, including electronic devices or phones to access the internet during the examination. During the examination, Kausar accessed the internet, including online forums, to assist with answering examination questions. Therefore, Kausar violated FINRA Rules 1210.05 and 2010

https://www.finra.org/sites/default/files/2022-07/autiero-awc-2022073741701.pdf
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Brandon Autiero submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Brandon Autiero was first registered in 2021 with Equitable Advisors, LLC. In accordance with the terms of the AWC, FINRA imposed upon Autiero a Bar from associating with any FINRA member in all capacities. As alleged in part in the AWC:

Autiero took the FINRA Series 7 examination on March 18, 2021, the NASAA Series 66 examination on June 15, 2021, July 21, 2021, and September 8, 2021, and the NASAA Series 63 examination on September 27, 2021. In each instance, Autiero had been provided an accommodation to take the examination online rather than in person. Prior to beginning each examination, Autiero attested that he had read and would abide by the relevant Rules of Conduct. These rules require candidates taking online examinations to store all personal items outside the room in which they take the exam, and prohibit any use, attempted use, or access to personal items, including electronic devices or phones to access the internet during the examination. During each qualification examination, Autiero accessed the internet, including online forums, to assist with answering examination questions. Therefore, Autiero violated FINRA Rules 1210.05 and 2010 while taking the Series 7 exam and FINRA Rule 2010 while taking the Series 66 and Series 63 exams.

https://www.brokeandbroker.com/6552/regulate-or-aggrieved-fcra/
In today's Guest Blog, anonymous author "Regulated or Aggrieved" notes the discrepancy between the data privacy required under the Federal Credit Reporting Act ("FCRA") and the relative lack of privacy of the Central Registration Depository ("CRD") data of hundreds of thousands of industry associated persons. The author wonders why CRD and FINRA accumulate and preserve their data in a manner that does not seem to conform to the letter of the FCRA law (or its spirit). Further, the author points to Regulation S-P, which protects brokerage customers' data, and asks why such a framework doesn't apply to the industry's employees.

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