SEC proxy voting advice rule codifies conflicts and review controls

The SEC adopted amendments to proxy solicitation rules on 22 July 2020, establishing new requirements for proxy voting advice businesses including review periods and conflict disclosure. The rules address concerns about proxy advisor accuracy and conflicts while preserving the role of voting advice in corporate governance.

Proxy Advice Business Regulation

Solicitation definition clarifications confirm that proxy voting advice is solicitation under Exchange Act Rule 14a-1(l), subjecting proxy advisors to antifraud provisions and certain procedural requirements. This codifies long-standing SEC interpretation.

Exemption conditions under Rule 14a-2(b)(9) permit proxy advisors to provide voting recommendations without filing proxy materials if they meet specified conditions including conflict disclosure, accuracy safeguards, and company review procedures.

Conflict of Interest Disclosure

Material conflict disclosure requires proxy advisors to disclose conflicts of interest in a manner reasonably designed to inform clients of those conflicts. Disclosures must be prominently presented and enable clients to assess advice objectivity.

Conflict categories include compensation from registrants for consulting services, business relationships with proponents or opponents of proposals, and any other circumstances creating potential bias in voting recommendations.

Policy and procedure disclosure requires advisors describe their methodology for identifying and addressing conflicts, enabling clients to evaluate conflict management effectiveness.

Company Review Requirements

Advance notice to companies requires proxy advisors to provide registrants with notice of intent to issue voting advice and a copy of the advice at least the specified period before distribution to clients. This enables companies to identify factual errors.

Response opportunity allows companies to provide written statements responding to proxy advisor recommendations. Advisors must either include company responses with distributed advice or provide mechanisms for clients to access company responses.

Error correction procedures require advisors to have policies reasonably designed to identify and address factual errors in voting advice. These procedures support accuracy without creating veto power over recommendations.

Institutional Investor Considerations

Fiduciary obligations of investment advisers extend to proxy voting decisions, requiring reasonable investigation to ensure votes are cast in clients' best interests. Reliance on proxy advisors must be reasonable given available information.

Custom voting policies enable institutional investors to establish voting guidelines that proxy advisors implement, reducing concerns about one-size-fits-all recommendations inappropriate for specific client circumstances.

Supplementary research beyond proxy advisor recommendations may be appropriate for significant votes, contested situations, or matters where institutional investors have particular expertise or concerns.

Corporate Issuer Implications

Engagement with proxy advisors becomes more structured under the amendments, with companies having defined opportunities to correct errors and present their perspectives on voting matters.

Disclosure coordination between proxy statement preparation and proxy advisor engagement requires attention to timing, ensuring advisors have accurate information when formulating recommendations.

Response strategy development should prepare companies to effectively communicate their positions when proxy advisors recommend against management proposals, using the response mechanisms the rules establish.

Key dates and milestones

The amendments took effect on December 1, 2021, for advice regarding shareholder meetings held on or after that date. Proxy advisors updated their procedures and disclosure practices as needed, with ongoing refinement based on practical experience.

If you are affected, review their proxy voting policies, assess proxy advisor reliance practices, and ensure governance processes address both company and investor perspectives on proxy voting advice regulation.