SEC Chairman Gensler Announces Re-Examination of Proxy Advisory Rules
June 5, 2021
SEC Chairman Gensler has initiated an examination of the proxy advisory rules finalized in 2020, with the likely goal of revisiting them. The same day, Commissioners Peirce and Roisman released a joint statement highlighting the need for proxy advisory reform while defending the SEC’s process for finalizing the rules in 2020.
The proxy advisory rules finalized in 2020 affirmed the SEC’s view that a proxy advisor’s report qualifies as a proxy solicitation. To remain exempt from filing and disclosure rules for proxy solicitations, proxy advisors would have to provide companies with a copy of their report, the opportunity to respond to errors, and disclose conflicts of interest. ISS, the largest proxy advisory firm, filed a lawsuit challenging the new rules but the SEC is now pausing any enforcement of the rules and is asking, along with ISS, that the court suspend the ISS litigation during its review.
For 2021, ISS suspended a long-standing policy of providing companies in the S&P 500 with a draft report and short period of time to review it for material errors. As it stands now, companies see their proxy reports at the same time as ISS clients. At that point of publication, investors (including ISS clients) have begun to submit their proxy votes. Companies must therefore attempt to contact ISS, convince them there is an error, and get then get ISS to publish an alert to clients detailing the error and any change to a vote recommendation. ISS is not currently required to make those changes – and if a proxy report is deemed not to qualify as a solicitation, they would not be subject to anti-fraud provisions prohibiting knowingly using false or misleading information.
Commissioners Peirce and Roisman questioned why this review is necessary given that compliance with the rules is not effective until December 2021. “[T]he compliance date for the exemption conditions is still months away, which makes it challenging, if not impossible, for us to know how these requirements will work in practice… We find it even harder to understand how the Commission would justify a departure from its longstanding legal interpretation about proxy solicitation.” The commissioners highlighted the extensive rulemaking process as well as the consideration and incorporation of multiple viewpoints (including those in opposition to the rule).
There has been no congressional effort to overturn the proxy advisory rule with the Congressional Review Act (as there was with adjustments to shareholder proposal eligibility requirements), so it’s puzzling why the SEC would choose to revisit these rules now. The Center will continue to advocate for the rules and will request the SEC provide an opportunity for public comments. If Subscribers have had specific ISS concerns during the 2021 proxy season, please let us know, as that will help make the case for maintaining the rules.