On April 30, 2020, Financial Times reported that the SEC has abandoned a key portion of its proposed rules issued on November 5, 2019 intended to improve the accuracy and transparency of proxy voting advice. The SEC is expected to no longer require proxy advisors to give issuers an opportunity to review and provide feedback on proxy voting advice before proxy advisors provide such advice to their clients. The review and feedback requirement was included in the proposal as a means for proxy advisors to avail themselves to the Rule 14a-2(b) exemption from the information and filing requirements, which would be necessary under the SEC's proposed rules deeming proxy advisors' recommendations to be solicitations.1 While business lobby groups supported the proposed rules, several hedge fund activists and traditional asset managers were strongly opposed to them as they felt it would give issuers too much influence over the research provided by the proxy advisors.
According to the FT report, the SEC is considering, as an alternative, to introduce a speed bump that would outlaw "robo-voting", a process where proxy advisors upon issuance of their recommendations automatically vote shares of certain of their clients. The sudden spike in proxy votes in line with proxy advisors' recommendations has raised concern among issuers that the institutional investors might be blindly following proxy advisors rather than actually evaluating the merits of individual proposals before casting their vote. It is the SEC's thinking that having a delay would allow the issuers time to rebut any adverse proxy advisors' recommendations to the institutional investors.
As it prepares its recommendations to the commissioners, the SEC staff is still considering all the comments, so the final rulemaking could still change. Also, activist hedge fund Elliott Management has objected that the speed bump idea was not contemplated in November 2019 proposed rules and therefore cannot be included in the final rules without restarting the process.
The change in the SEC's position would represent important relief for the proxy advisory firms while leaving most of the issuers who would like to see stronger rules unsatisfied. The proxy advisory firms likely will view any additional restrictions as unnecessary and a regulatory overreach by the SEC. The issuer community on the other hand will likely feel that after much promise little was done to diminish the out-size influence of the proxy advisory firms. While the SEC's move may seem like a truce, the battle between proxy advisory firms, corporate issuers and the SEC is far from over and the direction it takes will largely depend on the results of November's U.S. presidential elections.
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1 SEC's proposed rules in November 2019 codified its interpretation and guidance released in August 2019 that proxy advisor vote recommendations be considered solicitations under Rule 14a-1(l) of the Exchange Act.