# Conformed to Federal Register Version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A071c560d5b704463 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register Version SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34-89372; File No. S7-22-19] RIN: 3235-AM50 Exemptions from the Proxy Rules for Proxy Voting Advice AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting amendments to its rules governing proxy solicitations so that investors who use proxy voting advice receive more transparent, accurate, and complete information on which to make their voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice. The amendments add conditions to the availability of certain existing exemptions from the information and filing requirements of the Federal proxy rules that are commonly used by proxy voting advice businesses. These conditions require compliance with disclosure and procedural requirements, including conflicts of interest disclosures by proxy voting advice businesses and two principles-based requirements. In addition, the amendments codify the Commission’s interpretation that proxy voting advice generally constitutes a solicitation within the meaning of the Securities Exchange Act of 1934. Finally, the amendments clarify when the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the antifraud provision of the proxy rules, depending upon the particular facts and circumstances. DATES: Effective date: The rules are effective November 2, 2020. Compliance dates: See Section II.E. FOR FURTHER INFORMATION CONTACT: Daniel S. Greenspan, Senior Counsel, Office of Rulemaking, at (202) 551-3430 or Valian Afshar, Special Counsel, Office of Mergers and Acquisitions, at (202) 551-3440, in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 240.14a-1(l) (“Rule 14a-1(l)”), 17 CFR 240.14a-2 (“Rule 14a-2”), and 17 CFR 240.14a-9 (“Rule 14a-9”) under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (“Exchange Act”). 1 Unless otherwise noted, when we refer to the Exchange Act, or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 78a of the United States Code, at which the Exchange Act is codified, and when we refer to rules under the Exchange Act, or any paragraph of these rules, we are referring to title 17, part 240 of the Code of Federal Regulations [17 CFR 240], in which these rules are published. 1 2 TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 5 I. II. DISCUSSION OF FINAL AMENDMENTS .................................................................... 22 A. CODIFICATION OF THE COMMISSION’S INTERPRETATION OF “SOLICITATION” UNDER RULE 14A-1(L) AND SECTION 14(A) ................................... 22 1. Proposed Amendments .................................................................................................... 26 2. Comments Received ........................................................................................................ 28 3. Final Amendments........................................................................................................... 33 B. AMENDMENTS TO RULE 14A-2(B): CONFLICTS OF INTEREST .......................... 51 1. Proposed Amendments .................................................................................................... 51 2. Comments Received ........................................................................................................ 54 3. Final Amendments........................................................................................................... 58 C. AMENDMENTS TO RULE 14A-2(B): NOTICE OF PROXY VOTING ADVICE AND RESPONSE ............................................................................................................................... 68 1. Proposed Amendments .................................................................................................... 70 2. Comments Received ........................................................................................................ 73 3. Final Amendments........................................................................................................... 85 D. AMENDMENTS TO RULE 14A-9................................................................................. 124 1. Proposed Amendments .................................................................................................. 124 2. Comments Received ...................................................................................................... 127 3. Final Amendments......................................................................................................... 131 E. COMPLIANCE DATES ................................................................................................. 134 III. OTHER MATTERS ........................................................................................................ 136 IV. ECONOMIC ANALYSIS ............................................................................................... 136 A. B. C. 1. 2. INTRODUCTION ........................................................................................................... 137 Overview of Proxy Voting Advice Businesses’ Role in the Proxy Process ..................... 140 Commenter Concerns Regarding the Rule’s Economic Justification .............................. 146 1. 2. ECONOMIC BASELINE ............................................................................................... 149 Affected Parties and Current Market Practices ............................................................... 149 Current Regulatory Framework ..................................................................................... 167 BENEFITS AND COSTS ................................................................................................ 171 1. Overview of Benefits and Costs and Comments Received ............................................. 171 2. Codification of the Commission’s Interpretation of “Solicitation” Under Rule 14a-1(l) and Section 14(a) ......................................................................................................................... 175 3. Amendments to Rule 14a-2(b) ....................................................................................... 176 4. Amendments to Rule 14a-(9) ......................................................................................... 197 3 5. Effect on Smaller Entities .............................................................................................. 199 D. EFFECTS ON EFFICIENCY, COMPETITION, AND CAPITAL FORMATION ..... 200 1. Efficiency ...................................................................................................................... 200 2. Competition ................................................................................................................... 204 3. Capital Formation .......................................................................................................... 208 E. REASONABLE ALTERNATIVES ................................................................................ 209 1. Use a more prescriptive approach in the final amendments ............................................ 209 2. Require proxy voting advice businesses to include full registrant response in the businesses’ voting advice ...................................................................................................... 209 3. Public disclosure of conflicts of interest ......................................................................... 210 4. Require additional or alternative mandatory disclosures in proxy voting advice ............. 211 5. Require disabling or suspension of pre-populated and automatic submission of votes .... 212 6. Exempt smaller proxy voting advice businesses from the additional conditions to the exemptions ............................................................................................................................ 214 7. Require a Narrower Scope of Registrant Notice ............................................................. 215 V. PAPERWORK REDUCTION ACT ............................................................................... 216 A. BACKGROUND.............................................................................................................. 216 B. SUMMARY OF COMMENT LETTERS TO PRA ESTIMATES................................ 218 C. BURDEN AND COST ESTIMATES FOR THE AMENDMENTS .............................. 218 1. Impact on Affected Parties ............................................................................................. 219 2. Aggregate Increase in Burden ........................................................................................ 230 3. Increase in Annual Responses ........................................................................................ 231 4. Incremental Change in Compliance Burden for Collection of Information ..................... 232 5. Program Change and Revised Burden Estimates ............................................................ 233 VI. FINAL REGULATORY FLEXIBILITY ANALYSIS ................................................... 233 A. NEED FOR, AND OBJECTIVES OF, THE FINAL AMENDMENTS ........................ 234 B. SIGNIFICANT ISSUES RAISED BY PUBLIC COMMENTS..................................... 234 C. SMALL ENTITIES SUBJECT TO THE FINAL AMENDMENTS ............................. 236 D. PROJECTED REPORTING, RECORDKEEPING, AND OTHER COMPLIANCE REQUIREMENTS .................................................................................................................. 237 E. AGENCY ACTION TO MINIMIZE EFFECT ON SMALL ENTITIES ..................... 240 VII. STATUTORY AUTHORITY ......................................................................................... 242 4 I. INTRODUCTION Annual and special meetings of publicly traded corporations, where shareholders are provided the opportunity to vote on various matters, are a key component of corporate governance. The applicable laws are set by the state in which the corporation is incorporated. For various reasons, including the widely dispersed nature of public share ownership, most shareholders do not attend these meetings in person. Rather, most shareholders of publicly traded companies exercise their right to vote on corporate matters through the use of proxies. 2 Congress vested in the Commission the broad authority to oversee the proxy solicitation process when it originally enacted the Securities Exchange Act of 1934 (the “Exchange Act”). 3 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, 4 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. 5 See Concept Release on the U.S. Proxy System, Release No. 34-62495 (Jul. 14, 2010) [75 FR 42982 (July 22, 2010)] (“Concept Release”), at 42984. 2 See Regulation of Communications Among Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276 (Oct. 22, 1992)] (“Communications Among Shareholders Adopting Release”), at 48277 (“Underlying the adoption of Section 14(a) of the Exchange Act was a Congressional concern that the solicitation of proxy voting authority be conducted on a fair, honest and informed basis. Therefore, Congress granted the Commission the broad ‘power to control the conditions under which proxies may be solicited’ . . . .”). 3 See Concept Release at 42983 (“This complexity stems, in large part, from the nature of share ownership in the United States, in which the vast majority of shares are held through securities intermediaries such as broker-dealers or banks . . . .”). 4 See, e.g., id. at 43020 (“The U.S. proxy system is the fundamental infrastructure of shareholder suffrage since the corporate proxy is the principal means by which shareholders exercise their voting rights. The development of issuer, securities intermediary, and shareholder practices over the years, spurred in part by technological advances, has made the system complex and, as a result, less transparent to shareholders and to issuers. It is our intention that this system operate with the reliability, accuracy, transparency, and integrity that shareholders and issuers should rightfully expect.”). 5 5 In today’s financial markets, which are characterized by significant intermediation and institutional investor participation, 6 proxy voting advice businesses 7 have come to play an important role in the proxy voting process by providing an array of voting services that can help investment advisers and institutional investor clients manage their substantive and procedural proxy voting needs. 8 Investment advisers and institutional investors often retain proxy voting advice businesses to assist them in making their voting determinations on behalf of their own clients and to handle other aspects of the voting process, which for certain investment advisers has become increasingly complex and demanding over time. 9 Investment advisers voting on behalf of clients (including retail investors) and institutional investors, by virtue of their holdings in many public companies, including as a result of indexing and other broad portfolio management strategies, must manage the logistics of voting in potentially hundreds, if not thousands, of See Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Release No. 34-87457 (Nov. 5, 2019) [84 FR 66518 (Dec. 4, 2019)] (“Proposing Release”) at 66519. 6 For purposes of this release, we refer to firms that advise investment advisers and institutional investors on their voting determinations, and any person who markets and sells such advice, as “proxy voting advice businesses.” Unless otherwise indicated, the term “proxy voting advice” as used in this release refers to the voting recommendations provided by proxy voting advice businesses on specific matters presented at a registrant’s shareholder meeting, or for which written consents or authorizations from shareholders are sought in lieu of a meeting, and the analysis and research underlying the voting recommendations that are delivered to the proxy voting advice business’s clients through any means, such as in a standalone written report or multiple reports, an integrated electronic voting platform established by the proxy voting advice businesses, or any combination thereof. 7 The reference to “proxy voting advice,” as used in this release, is not intended to encompass (1) administrative or ministerial services, (2) data or research that is not used by a proxy voting advice business to formulate its voting recommendations, or (3) the identity of any of the proxy voting advice business’s clients that receive such advice. To the extent any data or research underlies a proxy voting advice business’s voting recommendations but is not delivered to its clients (such as internal work product), such data or research also would not constitute that business’s proxy voting advice. Further, we recognize that, in formulating its voting recommendations, a proxy voting advice business may use data and research that was prepared by another party, such as market intelligence and database providers. For the avoidance of doubt, the fact that a third party’s data and research is used by the proxy voting advice business would not, by itself, cause such third party to be a proxy voting advice business. However, if a proxy voting advice business uses a third party’s data and research in formulating its voting recommendations and delivers such data and research to its clients, then the data and research would constitute part of the proxy voting advice business’s proxy voting advice. 8 See Proposing Release at 66520, n.17. 9 Id. at 66519, n.9. 6 shareholder meetings and on thousands of proposals that are presented at these meetings each year, with the significant portion of those voting decisions concentrated in a period of a few months. 10 Proxy voting advice businesses typically provide investment advisers, institutional investors, and other clients with a variety of services that relate to the substance of voting decisions, such as: providing research and analysis regarding the matters subject to a vote; promulgating their generally applicable benchmark voting policies (a “benchmark policy”) or specialty voting policies (a “specialty policy”), such as a socially responsible policy, a sustainability policy, or a Taft-Hartley labor policy, 11 that their clients can use; and making specific voting recommendations to their clients on matters subject to a shareholder vote, either based on the proxy voting advice business’s benchmark or specialty policies or based on custom voting policies that are proprietary to a proxy voting advice business’s clients (“custom policy”). 12 This advice is often an important factor in the clients’ proxy voting decisions. Clients may use the proxy voting advice business’s recommendations in a variety of ways, including as an alternative or supplement to their own internal resources in analyzing matters when deciding how to vote.13 10 Id. at n.8. For example, the various benchmark and specialty policies of one proxy voting advice business, Institutional Shareholder Services (ISS), are set forth on the following web page: https://www.issgovernance.com/policygateway/voting-policies/. The various benchmark and specialty policies of another proxy voting advice business, Egan-Jones, are set forth on the following web page: https://www.ejproxy.com/methodologies/. 11 See Proposing Release at 66519. As discussed infra Section II.C.3.c.i., we are excluding from the requirements of new Rule 14a-2(b)(9)(ii) proxy voting advice to the extent that such advice is based on custom policies. Custom policies would not include the proxy voting advice businesses’ benchmark or specialty policies, even if those benchmark or specialty policies were to be adopted by proxy voting advice businesses’ clients. See infra note 394 for a discussion of how a proxy voting advice business may satisfy the requirements of new Rule 14a-2(b)(9)(ii) in situations in which a client’s custom policy is identical to the benchmark or specialty policies. 12 13 Id. 7 Proxy voting advice businesses may also provide services that assist clients in handling the administrative tasks of the voting process, typically through an electronic platform that enables their clients to cast votes more efficiently. 14 In some cases, proxy voting advice businesses are given authority to execute votes on behalf of their clients in accordance with the clients’ general guidance or specific instructions. 15 Although estimates vary, each year proxy voting advice businesses provide voting advice to thousands of clients that exercise voting authority over a sizable number of shares. 16 Because proxies have become the predominant means by which shareholders of publicly traded companies exercise their right to vote on corporate matters, 17 and institutional investors hold a significant and increasing number of shares, proxy voting advice businesses have become uniquely situated in today’s market to influence, 18 and in many cases directly execute, these investors’ voting decisions. 19 In recognition of the important and unique role that proxy voting advice businesses play in the proxy voting process 20 and in the voting decisions of investment advisers and institutional investors 21 who often vote on behalf of retail investors, the Commission proposed amendments to the Federal proxy rules in November 2019 to enhance the transparency, accuracy, and 14 Id. 15 Id. 16 Id. at 66520, n.18. 17 Id. at 66518, n.2. See, e.g., letter from Council of Inst. Investors (Nov. 14, 2019) (“CII I”) (noting that proxy voting advice businesses’ “recommendations and related analysis” may be “market-moving”). 18 19 See also infra note 36 for a discussion of the increased institutional investor holdings in the U.S. markets. 20 Id. at 66520. 21 Id. 8 completeness of the information provided to clients of proxy voting advice businesses in connection with their voting decisions. 22 Specifically, the Commission proposed amendments to codify its interpretation that proxy voting advice generally constitutes a solicitation within the meaning of Exchange Act Section 14(a) and therefore is subject to the Federal proxy rules. In addition, the Commission proposed to condition the availability of certain existing exemptions from the information and filing requirements of the Federal proxy rules commonly used by proxy voting advice businesses upon compliance with additional disclosure and procedural requirements. Finally, the Commission proposed to amend Exchange Act Rule 14a-9, the antifraud provision of the Federal proxy rules, to clarify that, depending upon the particular facts and circumstances at issue, the failure to disclose certain information in proxy voting advice may be considered materially misleading within the meaning of the rule. We received many comment letters in response to the Proposing Release. 23 After considering the public comments, we are adopting the proposed rules with certain modifications as 22 See generally Proposing Release. See generally letters submitted in connection with the Proposing Release, available at https://www.sec.gov/comments/s7-22-19/s72219.htm. Unless otherwise specified, all references in this release to comment letters are to those relating to the Proposing Release. In addition, the SEC’s Investment Advisory Committee adopted recommendations asking the Commission to: prioritize improvements to the proxy system (endto-end vote confirmations, reconciliations, and universal proxies); improve conflict-of-interest disclosure generally; enhance the discussion about the value of proxy advisors and shareholder proposals, and; expand the economic costbenefit analysis. See U.S. Securities & Exchange Commission Investor Advisory Committee, Recommendation of the SEC Investor Advisory Committee Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020) (“IAC Recommendation”), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/sec-guidance-and-rule-proposals-on-proxy-advisors-and-shareholder-proposals.pdf. These recommendations were not unanimously approved by the members of the Investor Advisory Committee; see letters from Stephen Holmes (Jan. 27, 2020) (“S. Holmes”); Paul G. Mahoney and J.W. Verret (Jan. 30, 2020) (“P. Mahoney and J.W. Verret”); Heidi Stam (Jan. 27, 2020). We address the substance of the IAC Recommendation, together with related public comments, in the discussion that follows. Finally, the 2019 Small Business Forum Report included a recommendation that the Commission provide “for effective oversight of proxy advisory firms under Rule 14a-2(b), with a focus on conflicts of interest, accuracy, transparency, and issuer-specific decision making.” This recommendation was tied for first place in the priority ranking assigned by the participants of the breakout group session. See Final Report of the 2019 SEC Government-Business Forum on Small Business Capital Formation (December 2019) (“2019 Small Business Forum”), available at https://www.sec.gov/files/small-business-forumreport-2019.pdf. 23 9 described, and for the reasons set forth, below. Consistent with the proposal, we are adhering to— and adopting an amendment to Rule 14a-1(l) to codify—our longstanding view that proxy voting advice generally constitutes a “solicitation” under Section 14(a). 24 Absent an applicable exemption, a person providing such proxy voting advice would be subject to the Federal proxy rules’ information and filing requirements, including the obligation to file and furnish definitive proxy statements. For reasons previously stated in the Proposing Release, we believe that proxy voting advice businesses should be eligible to rely on an exemption from such information and filing requirements for their proxy voting advice, but only to the extent that such exemption is appropriately tailored to their unique role in the proxy process and facilitates the transparency, accuracy, and completeness of the information available to those making voting decisions. As such, under the new rules that we are adopting, persons furnishing proxy voting advice constituting a solicitation as defined in new 17 CFR 240.14a-1(l)(1)(iii)(A) (“Rule 14a1(l)(1)(iii)(A)”) will be eligible to rely on the exemptions in 17 CFR 240.14a-2(b)(1) (“Rule 14a2(b)(1)”) and 17 CFR 240.14a-2(b)(3) (“Rule 14a-2(b)(3)”) 25 only upon satisfaction of the conditions of new 17 CFR 240.14a-2(b)(9) (“Rule 14a-2(b)(9)”). As described in more detail below, we have modified these conditions in a number of respects in response to comments received to provide appropriate flexibility to proxy voting advice businesses to meet the principles that underlie the objectives of the rule, and to avoid unnecessary potential disruptions to their ability to provide their clients with timely voting advice. In addition, consistent with the amendments to 17 CFR 240.14a-2(b) (“Rule 14a-2(b)”), we are amending Rule 14a-1(l) to make clarifying changes to the definition of solicitation as it relates to 24 See infra Section II.A.3. Proxy voting advice businesses have typically relied upon the exemptions in Rule 14a-2(b)(1) and (b)(3) to provide advice without complying with the filing and information requirements of the proxy rules. See Proposing Release at 66525 and n.68. 25 10 proxy voting advice and amending Rule 14a-9 to add to the list of examples provided in the Note to that rule. We are adopting these amendments to Rule 14a-1(l) and Rule 14a-9 substantially in the form proposed, with certain modifications as described in the discussion that follows. We recognize that for some shareholders, the services provided by proxy voting advice businesses can be an important component of the larger proxy voting process and, as such, help facilitate the participation of shareholders in corporate governance through the exercise of their voting rights. 26 We are also mindful that the efficacy and effectiveness of the proxy voting system depend on the ability of shareholders to obtain transparent, accurate, and materially complete information from an array of relevant parties before making their proxy voting decisions. To enable shareholders to make informed voting decisions, Congress and the Commission have placed varying obligations on participants in the proxy voting process, including through Commission rulemakings pursuant to the broad authority granted by Congress to regulate proxy solicitation. 27 For example, registrants and others who engage in a proxy solicitation generally must furnish shareholders with a definitive proxy statement containing numerous specified disclosures. 28 They must also generally file all of their additional soliciting materials with the Commission, which ensures that all shareholders and interested parties have access to their soliciting statements and have an ability to consider such statements as part of their voting decisions and, in certain situations such as in a proxy contest, respond to them. 29 The Commission, however, has long recognized that these general requirements applicable to 26 See Proposing Release at 66525. See infra notes 55-60 and accompanying text for a discussion of the multifaceted nature of the Federal securities laws’ security holder voting and ownership disclosure regulatory framework. 27 28 17 CFR 240.14a-3; 17 CFR 240.14a-101. 29 17 CFR 240.14a-6(b). 11 registrants and others engaged in a proxy solicitation may not be necessary under certain circumstances and, throughout the years, has tailored the application of these requirements as needed. For example, shareholders who beneficially own more than $5 million of securities and who do not seek proxy voting authority are exempt from the requirement to file a definitive proxy statement when they engage in a solicitation, but they still must publicly file with the Commission any written soliciting materials sent to security holders and are subject to the antifraud provisions of Rule 14a-9 with respect to the content of those soliciting materials. 30 Parties conducting certain other solicitation activities, including the furnishing of proxy voting advice, have relied on other exemptions from the requirement to file proxy statements. 31 Still other activity has been entirely exempt from the proxy rules, including Rule 14a-9. 32 The Commission has periodically adjusted the proxy rules in response to market developments, including to provide shareholders with additional sources of information. 33 In calibrating the rules and exemptions, the Commission has generally sought to avoid unnecessary burdens that may deter the expression of views on matters presented for a vote while ensuring that 30 17 CFR 240.14a-2(b)(1); 17 CFR 240.14a-6(g). 17 CFR 240.14a-2(b). Rules 14a-2(a) and (b) set forth a number of activities that fall within the definition of a solicitation but for which the requirement to file a definitive proxy statement does not apply. This includes, for example, the delivery of registrants’ proxy materials by securities intermediaries to their clients and the securities intermediaries’ request for voting instructions from their clients (Rule 14a-1(a)(1)), solicitations by or on behalf of a person who does not seek proxy authority (Rule 14a-2(b)(1)), solicitations of no more than ten persons (Rule 14a2(b)(2)), the furnishing of proxy voting advice by advisors to their clients under certain circumstances (Rule 14a2(b)(3)), the publication or distribution by a broker or a dealer of research reports under specified conditions (Rule 14a-2(b)(5)), and the solicitations through electronic shareholder forums by persons who do not seek proxy voting authority (Rule 14a-2(b)(6)). 31 32 17 CFR 240.14a-2(a). For example, the Commission has recalibrated the exemptions “to provide shareholders with additional sources of information, opinions and views” to inform their voting decisions, and to remove impediments that it determined “unduly hindered free discussion” among registrants, shareholders, and other interested parties. Communications Among Shareholders Adopting Release; see also Concept Release (“The Commission has actively monitored the proxy process since the 1930s and has made changes when the process was not functioning in a manner that adequately protected the interests of investors.”). 33 12 shareholders have transparent, accurate, and materially complete information upon which to make their voting decisions. 34 In this regard, the Commission has been guided by the “fundamental conclusion that the interests of shareholders are best served by more, and not less, discussion of matters presented for a vote.”35 This same principle guides us again as we update the Commission’s rules in light of current market practices and circumstances. As explained in the Proposing Release, proxy voting advice businesses have become an increasingly important and prominent part of the proxy voting process as institutional investors, who own a majority of the outstanding shares in today’s market, 36 often retain proxy voting advice businesses to assist them in making their voting determinations and voting their shares on behalf of clients. In recent years, registrants, investors, and others have expressed concerns about the role of proxy voting advice businesses. These concerns include the accuracy and soundness of the information, and the transparency of the methodologies, used to formulate proxy voting advice businesses’ recommendations. Concerns have also focused on potential conflicts of interest that may affect the recommendations made by the proxy voting advice businesses. 37 In addition, questions have been raised about whether registrants have an adequate opportunity to review and respond to proxy voting advice before votes, informed by such advice, are cast and whether shareholders have an adequate opportunity to review the proxy voting advice, including in the context of any response from the registrant or others, before casting their votes. 38 These concerns See Communications Among Shareholders Adopting Release (noting concerns about “secret” solicitations, as well as concerns about the burden on shareholders). 34 35 Id. See, e.g., A. DE LA CRUZ ET AL., OECD, OWNERS OF THE WORLD’S LISTED COMPANIES 22 (2019), available at https://www.oecd.org/corporate/Owners-of-the-Worlds-Listed-Companies.pdf (“In the United States, institutional investors hold around 72% of the domestic stock market value.”). 36 37 See Proposing Release at 66525. 38 See id. at 66529. 13 and changing market conditions, as discussed above, prompted the Commission to consider amendments to the exemptions commonly used by proxy voting advice businesses, which had been crafted before proxy voting advice businesses played the significant role that they now do in the proxy voting process and in the voting decisions of investment advisers and institutional investors.39 A number of the comment letters we received in response to the Proposing Release continue to express these concerns. 40 In updating our rules to facilitate better informed proxy voting, we do not believe that it is necessary to subject proxy voting advice businesses to the Federal proxy rules’ information and filing requirements applicable to registrants and certain others, such as the filing and furnishing of definitive proxy statements, as long as they satisfy certain requirements tailored to their role in the proxy process. In particular, we believe that concerns raised regarding the increase in intermediation and complexity in the market and the increased dependence on proxy voting advice can be addressed, and the goal of ensuring that shareholders receive more transparent, accurate, and complete information can be furthered, without the full set of disclosures that would be required with a definitive proxy statement. We also recognize that a requirement to publicly file proxy voting advice with the Commission and disseminate proxy materials to the shareholders of 39 See id. at 66519-21. See, e.g., letters from Mark A. Bloomfield, President and CEO, American Council for Capital Formation (Jan. 27, 2020) (“ACCF”); Kyle Isakower, Senior Vice Pres. of Reg. & Energy Policy, American Council for Capital Formation (July 7, 2020) (“ACCF II”); Cameron Arterton, Vice President, Biotechnology Innovation Organization (Feb. 3, 2020) (“BIO”); Business Roundtable (Feb. 3, 2020) (“BRT”); Tom Quaadman, Vice President, U.S. Chamber of Commerce Center for Capital Markets Competitiveness (Jan. 31, 2020) (“CCMC”); Henry D. Eickelberg, Chief Operating Officer, Center on Executive Compensation (Feb. 3, 2020) (“CEC”); Corporate Governance Coalition for Investor Value (Feb. 3, 2020) (“CGC”); Neil A. Hanson, Vice President, Investor Relations and Secretary, Exxon Mobil Corporation (Feb. 3, 2020) (“Exxon Mobil”); Rick E. Hansen, Assistant General Counsel and Corporate Secretary, General Motors Company (Feb. 25, 2020) (“GM”); Clifton A. Pemble, President and CEO, Garmin International, Inc. (Jan. 27, 2020) (“Garmin”); Brian S. Roman, Global General Counsel (Feb. 3, 2020) (“Mylan”); Chris Netram, Vice President, Tax & Domestic Economic Policy, National Association of Manufacturers (Feb. 3, 2020) (“NAM”); Tony M. Edwards, Senior Executive Vice President, and Victoria P. Rostow, Senior Vice President & Deputy General Counsel (Feb. 3, 2020) (“Nareit”); John A. Zecca, Executive Vice President, Chief Legal and Regulatory Officer, Nasdaq, Inc. (Feb. 3, 2020) (“Nasdaq”); Gary A. LaBranche, President & CEO, National Investor Relations Institute (Feb. 3, 2020) (“NIRI”); Darla Stuckey, President and CEO, Society for Corporate Governance (Feb. 3, 2020) (“SCG”) . 40 14 every registrant covered by the advice could result in the addition of significant substantive and procedural changes in the current operations of proxy voting advice businesses and could adversely impact their business models. For example, such a requirement would effectively allow investment advisers, institutional investors, and other investors who do not subscribe to the services of proxy voting advice businesses to obtain certain proxy voting advice services free of charge. For these reasons, we believe that as a general matter these businesses should continue to be eligible for the benefits of conditional, tailored exemptions from the information and filing requirements of the Federal proxy rules generally applicable to registrants and others. In light of the significant role proxy voting advice plays in the voting decisions of institutional investors and others, however, we also believe that the exemptions need to be fashioned both to elicit adequate disclosure and to enable proxy voting advice businesses’ clients to have reasonable and timely access to transparent, accurate, and complete information material to matters presented for a vote—thereby ensuring that the continued use of the exemptions facilitates informed voting decisions and does not undermine the purposes of the Federal proxy rules. Some commenters argued that the Investment Advisers Act of 1940 (the “Advisers Act”) is the proper regulatory regime for proxy voting advice businesses, and that the Advisers Act and an investment adviser’s fiduciary duty already address the stated objectives of the proposed rules. 41 We disagree. The Advisers Act and Section 14(a) serve distinct, though overlapping, regulatory purposes. The Advisers Act is a principles-based regulatory framework, at the center of which is a federal fiduciary duty to clients that is based on equitable common law principles. 42 Section 14(a) 41 See, e.g., letter from Gary Retelny, CEO, Institutional Shareholder Services, Inc. (Jan. 31, 2020) (“ISS”). See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release No. IA-5248 at 6 (June 5, 2019), 84 FR 33669, 33670 (July 12, 2019) (“Standard of Conduct for Investment Advisers”); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (noting that the Advisers Act “reflects a congressional recognition ‘of the delicate fiduciary nature of an investment advisory relationship,’ as well as a congressional intent 42 15 grants the Commission broad power to adopt rules to control the conditions under which proxies may be solicited in order to address a Congressional concern that the solicitation of proxy voting authority be conducted on a fair, honest, and informed basis. 43 As a preliminary matter, we note that proxy voting advice businesses differ as to whether they believe they fall within the definition of an investment adviser under the Advisers Act and should be registered as investment advisers. The Commission has stated previously that when proxy voting advice businesses provide certain services, they meet the definition of investment adviser under the Advisers Act and thus are subject to regulation under the Act. 44 Specifically, a person is an “investment adviser” if the person, for compensation, engages in the business of providing advice to others as to the value of securities, whether to invest in, purchase, or sell securities, or issues reports or analyses concerning securities. 45 Proxy voting advice businesses provide analyses of shareholder proposals, director candidacies, or corporate actions and provide advice concerning particular votes in a manner designed to assist their institutional clients to achieve their investment goals with respect to the voting of securities they hold. 46 In other words, proxy voting advice businesses, for compensation, engage in the business of issuing reports or analyses concerning securities and providing advice to others as to the value of securities and would therefore meet the definition of an investment adviser unless an exclusion applies. 47 to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser -- consciously or unconsciously -- to render advice which was not disinterested”). 43 See Communications Among Shareholders Adopting Release at 48277; Proposing Release at n.3. 44 See Concept Release at 43010. Advisers Act Section 202(a)(11) [15 U.S.C. § 80b-2(a)(11)]. Sections 202(a)(11)(A) through (G) of the Advisers Act address exclusions to the definition of the term “investment adviser.” [15 U.S.C. 80b-2(a)(11)(A) through (G)]. 45 46 See Concept Release at 43010. 47 Id. 16 One such exclusion from the definition of an investment adviser under the Advisers Act is the “publisher’s exclusion.” Specifically, Section 202(a)(11)(D) of the Advisers Act excludes from the definition of an investment adviser a “publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.” 48 At least one large proxy voting advice business has taken the position that if it was deemed to be an investment adviser, it could rely on the exclusion for publishers contained in Section 202(a)(11)(D) of the Advisers Act. 49 Regardless of the applicability of the Advisers Act, however, we believe the concerns motivating the rules we are adopting are squarely subject to, and appropriately addressed through, regulation under Section 14(a). 50 As we noted in the Proposing Release, proxy voting advice businesses provide voting advice to clients that exercise voting authority over a sizable number of Lowe v. SEC, 472 U.S. 181 (1985). The U.S. Supreme Court has interpreted the “publisher’s exclusion” to include publications that offer impersonal investment advice to the general public on a regular basis. To qualify for the section 202(a)(11)(D) exclusion, the publication must be: (1) of a general and impersonal nature, in that the advice provided is not adapted to any specific portfolio or any client’s particular needs; (2) “bona fide” or genuine, in that it contains disinterested commentary and analysis as opposed to promotional material; and (3) of general and regular circulation, in that it is not timed to specific market activity or to events affecting, or having the ability to affect, the securities industry. 48 See letter from Katherine Rabin, CEO, Glass Lewis & Co., LLC (Nov. 14, 2018), available at https://www.glasslewis.com/wp-content/uploads/2018/11/GL-SEC-Roundtable-Statement-111418.pdf. The Government Accountability Office in its Report about proxy advisory firms to the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate in 2016 also took note of the differences in registration status of proxy advisory firms. The Report observed that one large proxy voting advice business is not registered with the SEC as an investment adviser, while another is, and a third is registered as a nationally recognized statistical rating organization. See Report to the Chairman, Subcommittee on Economic Policy, Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Corporate Shareholder Meetings, Proxy Advisory Firms’ Role in Voting and Corporate Governance Practices from the U.S. Government Accountability Office (Nov. 2016), available at https://www.gao.gov/assets/690/681050.pdf. 49 Whether an entity meets the definition of an investment adviser or is eligible for an exclusion does not impact the analysis of whether it is engaged in “solicitation” for purposes of Section 14(a). Relatedly, the retention of a proxy voting advice business does not relieve an investment adviser of its obligations under the Advisers Act to its clients. See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325, pp. 5-6 (Aug. 21, 2019) [84 FR 47420, 42421 (Sept. 10, 2019)] (“Commission Guidance on Proxy Voting Responsibilities”), Question No. 2 at 12, 84 FR 47423 (discussing steps that an investment adviser that has assumed the authority to vote proxies on behalf of clients could take to demonstrate that it is making voting determinations in a client’s best interest); see also Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5547 (July 22, 2020) (“Supplemental Proxy Voting Guidance”). 50 17 shares that are voted annually, and these businesses are uniquely situated in today’s market to influence investors’ voting decisions. 51 This advice also implicates interests beyond those of the clients who utilize it when voting. Because these clients vote shares they hold on behalf of thousands of retail investors, this advice affects the interests of these underlying investors. Further, in light of proxy voting advice businesses’ clients’ ability to affect the outcome of the vote on a particular matter through their voting power, the proxy voting advice guiding the clients’ votes potentially affects the interests of all shareholders 52 of the registrant, the registrant, and the proxy system in general. 53 In the areas of proxy voting, proxy solicitation, and related activities, the Advisers Act, Section 14(a), and various other statutes and Commission rules do not operate independently from each other and are not mutually exclusive. Rather, depending on the activity and status of the person involved, more than one statutory provision and related rules may apply, with the various provisions complementing each other. For example, Section 13(d) of the Exchange Act and the related rules 54 are designed to ensure that market participants are informed when any shareholder (or group of shareholders) acquires more than five percent of a class of equity securities registered under Exchange Act Section 12. 55 Section 13(d) and the related rules generally require these holders to disclose publicly their ownership and other information mandated by the Commission, such as any plans that the holders may have to change the board of directors or management or to 51 See Proposing Release at 66520. 52 See supra note 18. Cf. J. I. Case Co. v. Borak, 377 U.S. 426, 432 (1964) (“The injury which a stockholder suffers from corporate action pursuant to a deceptive proxy solicitation ordinarily flows from the damage done the corporation, rather than from the damage inflicted directly upon the stockholder. The damage suffered results not from the deceit practiced on him alone but rather from the deceit practiced on the stockholders as a group.”). 53 54 17 CFR 240.13d-1 through 13d-102 (“Rules 13d-1 through 13d-102”). 55 15 U.S.C. 78m(d). 18 engage in extraordinary transactions (such as mergers or material asset sales), for so long as the holdings exceed the five percent threshold as well as any material changes to these disclosures. 56 These mandated disclosures, which are provided in Schedule 13D, along with the short-form Schedule 13G adopted pursuant to Exchange Act Section 13(g), 57 have proven important to investor protection by providing public notice of significant accumulations of securities by a person that may affect the control of the company and, ultimately, the interests of all security holders in the company, including in the context of proxy voting. Yet, the obligation for a shareholder to file Schedules 13D or 13G does not obviate the shareholder’s obligation to comply with Section 14(a) and the Federal proxy rules to the extent that the shareholder engages in activities that constitute a proxy solicitation. For example, a dissident shareholder seeking to solicit proxy authority to elect its own director nominees to a registrant’s board in a contested election must still file and furnish a definitive proxy statement even though the dissident shareholder may have previously disclosed in its Schedule 13D the plan to change the board of directors. This is the result of Congress establishing these two separate statutory provisions with different purposes, with Section 13(d) focused on providing notice about concentration of voting power and the use of that power, including to change or influence the control of the issuer, and Section 14(a) focused on providing information needed for informed shareholder voting, and the fact that a shareholder may engage in an activity that triggers obligations under both provisions. The two statutory obligations often complement each other. For example, Exchange Act Rule 13d-1 provides certain shareholders, including many classes of institutional shareholders, 56 17 CFR 240.13d-101. 57 15 U.S.C. 78m(g). 19 with a tailored, conditional exemption from the general requirements of Section 13(d) if the shareholder has acquired the securities “in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer.” 58 In various circumstances where shareholders are voting by proxy, and solicitation activity is ongoing—for example, the election of directors or the approval of an extraordinary corporate transaction—the information required to be disclosed publicly by Section 13(d) may be material to a voting decision and, accordingly, important to the regulation of the proxy voting process. Similarly, the Commission—noting that Section 13(d) already sets forth the circumstances for when public disclosures of such plans, proposals, or agreements are needed—adopted the Rule 14a-2(b)(1) exemption despite concerns from some commenters that proxy filings are needed for disclosure of a shareholder’s plans or proposals regarding the registrant or shareholders’ voting agreements on a particular matter. 59 At the same time, the exemption is not available for solicitations by any person who, while not seeking proxy authority, is nevertheless required to file a Schedule 13D or has disclosed in the Schedule 13D an intent (or reserved the right) to engage in a change of control 58 17 CFR 240.13d-1(b)(1)(i). See Communications Among Shareholders Adopting Release at 48278 (“When and under what circumstances a large shareholder, or group of shareholders acting together, must reveal to the SEC, the company, other shareholders, and the market its plans and proposals regarding the company has been addressed by Congress, but not through the provisions governing proxy solicitations. Section 13(d) of the Exchange Act, as implemented by the Commission in its regulations adopted thereunder, sets forth the circumstances when public disclosure of plans and proposals by significant shareholders, as well as agreements among shareholders to act together with respect to voting matters, must be disclosed to the market.”). See also Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)] (stating the Commission’s views on when a significant shareholder’s proxy soliciting activities and communications could be viewed as having the purpose or effect of changing or influencing control of the company and thereby triggering the obligation to file a Schedule 13D). 59 Under Section 13(d) and Section 13(g), a “group” is formed when two or more persons act together for the purpose of acquiring, holding, voting or disposing of the securities. Congress created the “group” concept to prevent persons who seek to pool their voting or other interests in the securities of an issuer from evading the Section 13(d) or 13(g) obligations because no one person owns more than five percent of the securities. Use of a proxy voting advice business by investors as a vehicle for the purpose of coordinating their voting decisions regarding an issuer’s securities without complying with the filing obligations of Section 13(d) or 13(g) would raise compliance concerns under the beneficial ownership reporting requirements. 20 transaction or a contested director election, given the heightened need for the proxy disclosures from a person contemplating such transformative transactions or contests. Other statutes that often play an important and complementary role in furthering all aspects of the Commission’s mission in the context of proxy voting and proxy solicitation include Sections 5, 11, and 12 of the Securities Act of 1933 (the “Securities Act”), in particular in circumstances where the vote being solicited is in connection with a significant transaction, such as a merger, in which new securities may be issued to the shareholders who are voting on the transaction. In such a situation, both the registration and prospectus requirements of Securities Act Section 5 and the proxy solicitation requirements of Exchange Act Section 14(a) apply, with public companies often filing a joint proxy statement/prospectus to fulfill both statutory obligations. This framework—complementary and overlapping statutes and rules that are based on principles, facts and circumstances, and each participant’s actions as well as status—applies similarly in other key areas of the Commission’s mandate, including the offer and sale of securities in both the public and private markets, securities trading, and the provision of investment advice to retail and institutional investors. Moreover, this framework is consistent with Congressional intent as reflected in the enactment of the Securities Act, the Exchange Act, the Advisers Act, and various other key statutes, including Section 14(a), and has proven to be an effective and efficient means to regulate an important, multi-faceted and ever-evolving aspect of commerce. Accordingly, given the importance of a properly functioning proxy system to investors and the capital markets, even if other provisions of the federal securities laws may apply to certain of their activities, it is appropriate for voting advice furnished by proxy voting advice businesses to be subject to the rules under Section 14(a), which are designed specifically to 21 enhance the transparency and integrity of the proxy voting process, with the ultimate aim of facilitating informed voting decisions. 60 II. DISCUSSION OF FINAL AMENDMENTS A. Codification of the Commission’s Interpretation of “Solicitation” Under Rule 14a1(l) and Section 14(a) Exchange Act Section 14(a) 61 makes it unlawful for any person to “solicit” any proxy with respect to any security registered under Exchange Act Section 12 in contravention of such rules and regulations prescribed by the Commission. 62 The purpose of Section 14(a) is to prevent “deceptive or inadequate disclosure” from being made to shareholders in a proxy solicitation. 63 Section 14(a) grants the Commission broad authority to establish rules and regulations to govern proxy solicitations “as necessary or appropriate in the public interest or for the protection of investors.”64 The Exchange Act does not define what constitutes a “solicitation” for purposes of Section 14(a) and the Commission’s proxy rules. Accordingly, the Commission has exercised its rulemaking authority over the years to define what communications are solicitations and to prescribe rules and regulations when necessary and appropriate in the public interest and to protect 60 See Proposing Release at 66520. 61 15 U.S.C. 78n(a). Registrants only reporting pursuant to Exchange Act Section 15(d) are not subject to the federal proxy rules, while foreign private issuers are exempt from the requirements of Section 14(a). 17 CFR 240.3a12-3(b). 62 Borak, 377 U.S. at 432; see S. Rep. No. 1455, 73d Cong., 2d Sess., 74 (1934) (“In order that the stockholder may have adequate knowledge as to the manner in which his interests are being served, it is essential that he be enlightened not only as to the financial condition of the corporation, but also as to the major questions of policy, which are decided at stockholders’ meetings.”); Communications Among Shareholders Adopting Release at 48277. 63 15 U.S.C. 78n(a); see Borak, 377 U.S. at 432 (noting the “broad remedial purposes” evidenced by the language of Section 14(a)). 64 22 investors in the proxy voting process. 65 The Commission first promulgated rules in 1935 to define a solicitation to include any request for a proxy, consent, or authorization or the furnishing of a proxy, consent, or authorization to security holders. 66 Since then, the Commission has amended the definition as needed to respond to new and changing market practices that have raised the concerns underlying Section 14(a). 67 In particular, the Commission expanded the definition of a solicitation in 1956 to include not only requests for proxies, but also any “communication to security holders under circumstances reasonably calculated to result in the procurement, execution, or revocation of a proxy.” 68 This expanded definition was prompted by recognition that some market participants were distributing written communications designed to affect shareholders’ voting decisions well in advance of any formal request for a proxy that would have triggered the filing and information requirements of the federal proxy rules. 69 Since 1956, the Commission has recognized that its definition of a solicitation was broad and applicable regardless of whether persons communicating with shareholders were seeking proxy authority for themselves. 70 In light of the breadth of this definition, the Commission 65 See 15 U.S.C. 78n(a); 78c(b); 78w. 66 See Order Execution Obligations, Release No. 34-378 (Sept. 24, 1935) 1935 WL 29270. The Commission revised the definition in 1938 to include any request for a proxy, regardless of whether the request is accompanied by or included in a written form of proxy. See Release No. 34-1823 (Aug. 11, 1938) [3 FR 1991 (Aug. 13, 1938)], at 1992. It subsequently revised the definition in 1942 to include “any request to revoke or not execute a proxy.” See Release No. 34-3347 (Dec. 18, 1942) [7 FR 10653 (Dec. 22, 1942)], at 10656. Courts have also taken a broad view of solicitation. See infra notes 141-146 and accompanying text. 67 17 CFR 240.14a-1(l)(1)(iii); see Adoption of Amendments to Proxy Rules, Release No. 34-5276 (Jan. 17, 1956) [21 FR 577 (Jan. 26, 1956)], at 577; see also Broker-Dealer Participation in Proxy Solicitations, Release No. 34-7208 (Jan. 7, 1964) [29 FR 341 (Jan. 15, 1964)] (“Broker-Dealer Release”), at 341 (“Section 14 and the proxy rules apply to any person—not just management, or the opposition. This coverage is necessary in order to assure that all materials specifically directed to stockholders and which are related to, and influence their voting will meet the standards of the rules.”). 68 69 See generally Communications Among Shareholders Adopting Release. 70 Id. at 48276 (adopting Exchange Act Rule 14a-2(b)(1)). 23 adopted an exemption from the information and filing requirements of the Federal proxy rules for communications by persons not seeking proxy authority, but continued to include such communications within the definition of a “solicitation.” 71 The Commission also adopted another exemption from the information and filing requirements for proxy voting advice given by advisors to their clients under certain circumstances, but likewise continued to include such advice within the definition of “solicitation,” subject to an exception discussed below. 72 By adopting these tailored exemptions, the Commission removed certain filing and other requirements that were considered unnecessary for such solicitations in order to facilitate shareholder access to more sources of information when voting, though the antifraud provisions of the proxy rules continued to apply. The Commission has previously observed that the definition of a solicitation for purposes of Section 14(a) may result in proxy voting advice businesses being subject to the Federal proxy rules because they provide recommendations that are reasonably calculated to result in the procurement, withholding, or revocation of a proxy and thus, as a general matter, the furnishing of proxy voting advice constitutes a solicitation. 73 In 2019, the Commission issued an interpretative release regarding the application of the Federal proxy rules to proxy voting advice. 74 As the Commission explained in that release, the determination of whether a communication is a solicitation for purposes of Section 14(a) depends upon both the specific nature, content, and 71 See id. 72 See Shareholder Communications, Shareholder Participation in Corporate Electoral Process and Corporate Governance Generally, Release No. 34-16356 (Nov. 21, 1979) [44 FR 68764 (Nov. 29, 1979)] (“1979 Adopting Release”), at 68766. 73 See Concept Release at 43009. See also Proposing Release at 66522; Broker-Dealer Release at 341. 74 Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Release No. 34-86721 (Aug. 21, 2019) [84 FR 47416 (Sept. 10, 2019)] (“Commission Interpretation on Proxy Voting Advice”). 24 timing of the communication and the circumstances under which the communication is transmitted. 75 The Commission noted several factors that indicate proxy voting advice businesses generally engage in solicitations when they provide proxy voting advice to their clients, including: • The proxy voting advice generally describes the specific proposals that will be presented at the registrant’s upcoming meeting and presents a “vote recommendation” for each proposal that indicates how the client should vote; • Proxy voting advice businesses market their expertise in researching and analyzing matters that are subject to a proxy vote for the purpose of assisting their clients in making voting decisions; • Many clients of proxy voting advice businesses retain and pay a fee to these firms to provide detailed analyses of various issues, including advice regarding how the clients should vote through their proxies on the proposals to be considered at the registrant’s upcoming meeting or on matters for which shareholder approval is sought; and • Proxy voting advice businesses typically provide their recommendations shortly before a shareholder meeting or authorization vote,76 enhancing the likelihood that their recommendations will influence their clients’ voting determinations. 77 The Commission observed that where these or other significant factors (or a significant subset of See Commission Interpretation on Proxy Voting Advice at 47417. See also Proposing Release at 66522; Concept Release at 43009 n.244. 75 See, e.g., letter from Maria Ghazal, Senior Vice President and Counsel, Business Roundtable (June 3, 2019) at 9 (“[R]ecent survey results support the contention that a spike in voting follows adverse voting recommendations by ISS during the three-business day period immediately after the release of the recommendation.”); Transcript of Roundtable on the Proxy Process, at 242 (Nov. 15, 2018), available at https://www.sec.gov/files/proxy-round-table-transcript111518.pdf; Frank Placenti, Are Proxy Advisors Really A Problem?, AMERICAN COUNCIL FOR CAPITAL FORMATION 3 (Oct. 2018), http://accfcorpgov.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport_FINAL.pdf. 76 77 Commission Interpretation on Proxy Voting Advice at 47418. See also Proposing Release at 66522. 25 these or other factors) are present,78 the proxy voting advice businesses’ voting advice generally would constitute a solicitation subject to the Commission’s proxy rules because such advice would be “a communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” 79 Furthermore, the Commission explained that such advice generally would be a solicitation even if the proxy voting advice business is providing recommendations based on the client’s own custom policies, and even if the client chooses not to follow the advice. 80 In addition, the fact that proxy voting advice businesses may provide additional services, such as consulting services to investment advisers and issuers and general market commentary, does not diminish their role in the proxy solicitation process. 1. Proposed Amendments In the Proposing Release, the Commission proposed to amend 17 CFR 240.14a-1(l)(1)(iii) (“Rule 14a-1(l)(1)(iii)”) to add paragraph (A) to make clear that the terms “solicit” and “solicitation” include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee. 81 The proposed amendment would codify the long-held Commission view that the furnishing of proxy voting advice generally constitutes a solicitation governed by the federal proxy rules. In connection with the proposed amendment to Rule 14a-1(l)(1)(iii), the Commission recognized that the major proxy voting advice businesses may use more than one voting policy or Such other factors may include the fact that many proxy voting advice businesses’ recommendations are typically distributed broadly. 78 79 See Commission Interpretation on Proxy Voting Advice at 47418. See also Proposing Release at 66522. 80 See Commission Interpretation on Proxy Voting Advice at 47418. See also Proposing Release at 66522. 81 Proposing Release at 66522, 66557. 26 set of guidelines in formulating their voting recommendations on a particular matter to be voted at a shareholder meeting (or for which written consents or authorizations are sought in lieu of a meeting). For example, a proxy voting advice business may offer differing voting recommendations on a matter based on the application of its benchmark policy or various specialty policies. Under the proposal, the voting recommendations formulated under the benchmark policy and each of the specialty policies would be considered to be a separate communication of proxy voting advice under proposed Rule 14a-1(l)(1)(iii)(A). In addition to voting recommendations formulated pursuant to a proxy voting advice business’s benchmark and specialty policies, the Commission also proposed to include voting recommendations formulated pursuant to a proxy voting advice business’s client’s own custom policies within the scope of the term “solicitation,” consistent with its prior interpretation. 82 Lastly, the Commission proposed to amend Rule 14a-1(l)(2), which currently lists activities and communications that do not constitute a solicitation, to add paragraph (v) to make clear that the terms “solicit” and “solicitation” exclude any proxy voting advice furnished by a person who furnishes such advice only in response to an unprompted request.83 Doing so would codify the Commission’s historical view that such a communication should not be regarded as a solicitation subject to the proxy rules. 84 82 Proposing Release at 66522. 83 Id. at 66523, 66557. Commission Interpretation on Proxy Voting Advice at 47419 (“We view these services provided by proxy advisory firms as distinct from advice prompted by unsolicited inquiries from clients to their financial advisors or brokers on how they should vote their proxies, which remains outside the definition of solicitation.”); 1979 Adopting Release at 68766. See also Broker-Dealer Release at 341 (setting forth the opinion of the SEC’s General Counsel that a broker is not engaging in a “solicitation” if it is merely responding to his customer’s request for advice and “not actively initiating the communication”). 84 27 2. Comments Received Commenters expressed a mix of views on the Commission’s proposed amendments to the definitions of “solicit” and “solicitation” in 17 CFR 240.14a-1(l)(1) (“Rule 14a-1(l)(1)”). A number of commenters supported codifying the Commission’s interpretation of those definitions as proposed. 85 Some of these commenters described the proposed amendments as consistent with the Commission’s existing interpretation of the term “solicitation” 86 and noted that the advice provided by proxy voting advice businesses is the kind of information that Congress intended Section 14(a) to address. 87 Two commenters agreed with the Commission’s position that the definition of “solicitation” should not be limited to a request to obtain proxy authority or to obtain shareholder support for a preferred outcome. 88 Those two commenters also agreed with the Commission’s view that each voting recommendation formulated pursuant to a benchmark policy or a specialty policy should be considered a separate “solicitation.” 89 Other commenters added that the analysis of what constitutes a “solicitation” should not turn on whether the proxy voting advice business’s voting recommendations are based on an investor’s custom policy or the proxy voting advice business’s benchmark policy. 90 Finally, a few commenters that supported the proposed amendments recommended that the Commission include in the definition of See letters from BIO; BRT; CCMC; CEC; CGC; Michael McCormick, Executive Vice President, General Counsel Secretary, Ecolab Inc. (Feb. 3, 2020) (“Ecolab”); Exxon Mobil; Dennis E. Nixon, President, International Bancshares Corporation (Jan. 23, 2020) (“IBC”); NAM; Nareit; Nasdaq; David Dixon, President, and David L. Dragics, Advocacy Ambassador, NIRI Capital Area Chapter (Feb. 6, 2020) (“NIRI-Capital”); Phil Gramm (Feb. 3, 2020) (“P. Gramm”); Niels Holch, Executive Director, Shareholder Communications Coalition (Feb. 3, 2020) (“SCC I”); SCG; Stakeholders Empowerment Service (Jan. 31, 2020) (“SES”). 85 86 See letters from BRT; CCMC; NAM; Nasdaq; NIRI-Capital. 87 See letters from BRT; CCMC; Exxon Mobil; NAM; Nareit; SCC I. 88 See letters from NAM; SCG. 89 See letters from NAM; SCG. 90 See letters from Exxon Mobil; NAM; SCG. 28 “solicitation” any reports and ratings by environmental, social, and governance ratings firms or environmental and sustainability rating firms. 91 Other commenters opposed codifying the Commission’s interpretation of “solicit” and “solicitation.” 92 Some commenters asserted that the Commission does not have the authority to regulate proxy voting advice businesses under Section 14(a) 93 or other provisions of the Exchange Act. 94 Some described the proposal as inconsistent with the Commission’s historical treatment of Section 14(a). 95 Some commenters added that proxy voting advice differs from proxy solicitation 91 See letters from Exxon Mobil; Garmin; NAM. See letters from Anat Admati, George G.C. Parker Professor of Finance and Economics, Stanford Graduate School of Business, et al. (Jan. 15, 2020) (“62 Professors”); Brandon Rees, Deputy Director, Corporations at Capital Markets, AFL-CIO (Feb. 3, 2020) (“AFL-CIO II”); Robert Arnold and Matthew Aquiline, Trustees, Bricklayers & Trowel Trades International Pension Fund (Jan. 31, 2020) (“Bricklayers”); Marcie Frost, Chief Executive Officer, CalPERS (Feb. 3, 2020) (“CalPERS”); Aeisha Mastagni, Portfolio Manager, California State Teachers’ Retirement System (Feb. 3, 2020) (“CalSTRS”); Marcia Moffat, Board Chair, Canadian Coalition for Good Governance (Feb. 3, 2020) (“Canadian Governance Coalition”); James Allen, Head, and Matt Orsagh, Senior Director, Capital Markets Policy, CFA Institute (Feb. 3, 2020) (“CFA Institute I”); Kenneth A. Bertsch, Executive Director, and Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors (Jan. 30, 2020) (“CII IV”); Rob Collins, Council for Investor Rights and Corporate Accountability (Feb. 3, 2020) (“CIRCA”); Ron Baker, Executive Director, Colorado Public Employees’ Retirement Association (Feb. 3, 2020) (“Colorado Retirement”); Duane Roberts, Director of Equities, Dana Investment Advisors (Dec. 5, 2019) (“Dana”); Richard B. Zabel, General Counsel and Chief Legal Officer, Elliott Management Corporation (Jan. 31, 2020) (“Elliott I”); Hans-Christoph Hirt, Executive Director and Head, Hermes Equity Ownership Services Limited (Feb. 3, 2020) (“Hermes”); ISS, Josh Zinner, CEO, Interfait Center on Corporate Responsibility (Feb. 3, 2020) (“Interfaith Center II”); Kevin Cameron, Executive Chair, Glass Lewis (Feb. 3, 2020) (“Glass Lewis II”); Jonathan Grabel, Chief Investment Officer, LACERA (Feb. 3, 2020) (“LA Retirement”), Sarah Wilson, CEO, Minerva Analytics (Jan. 2, 2020) (“Minerva I”); Thomas P. DiNapoli, New York State Comptroller (Feb. 3, 2020) (“New York Comptroller II”); Karen Carraher, Executive Director, and Patti Brammer, Corporate Governance Officer, Ohio Public Employees Retirement System (Feb. 3, 2020) (“Ohio Public Retirement”); PIRC, on behalf of Local Authority Pension Fund Form (LAPFF) (Feb. 3, 2020) (“PIRC”); Fiona Reynolds, Chief Executive Officer, Principles for Responsible Investment (Feb. 3, 2020) (“PRI II”); Konstantinos Sergakis, Professor of Capital Markets Law and Corporate Governance, University of Glasgow (Dec. 26, 2019) (“Prof. Sergakis”); Craig M. Rosenberg, President, ProxyVote Plus, LLC (Feb. 3, 2020) (“ProxyVote II”); Hank Kim, Executive Director & Counsel, National Conference of Public Employee Retirement Systems (Feb. 3, 2020) (“Public Retirement Systems”); Maureen O’Brien, Vice President, Corporate Governance Director, Segal Margo Advisors (Feb. 3, 2020) (“Segal Marco II”); Andrew E. Oster, CFP, AIF, President & CCO, Triton Wealth Advisors LLC (Feb. 22, 2020) (“Triton”); Nell Minow, Vice Chair, ValueEdge (Jan. 31, 2020) (“ValueEdge I”); Theresa Whitmarsh, Executive Director, Washington State Investment Board (Jan. 22, 2020) (“Washington State Investment”). 92 See letters from AFL-CIO II; CII IV; Elliott I; Glass Lewis II; ISS; Richard A. Kirby and Beth-ann Roth, RK Invest Law, PBC (Feb. 3, 2020) (“RK Invest Law”); ProxyVote II. 93 94 See letter from ISS. 95 See letters from CalPERS; CII IV; Elliott I; Glass Lewis II; ISS; ProxyVote II. 29 and should not be treated as such under the proxy rules. 96 Specifically, these commenters asserted that proxy solicitation differs from proxy advice in that proxy solicitors play an advocacy role on behalf of an interested party, whereas proxy voting advice businesses are independent third parties, hired by shareholders to provide objective advice that the recipients are not required to follow. 97 One commenter also asserted that the proposal incorrectly equates proxy voting advice with the right to vote on another’s behalf and in a manner that would benefit a particular party. 98 Two other commenters, which were identified as proxy voting advice businesses in the Proposing Release, 99 asserted that even if the Commission amends the definition of “solicitation” as proposed, their activities will not constitute “solicitations” under the revised definition because they vote on behalf of their clients rather than providing them with research reports and voting recommendations. 100 In addition, some commenters stated that the proposed codification of “solicitation” would increase proxy voting advice businesses’ costs 101 or interfere with their ability to provide services to their clients. 102 Specifically, these commenters asserted that the proposed amendments would See letters from Bricklayers; CalPERS; CII IV; CIRCA; Elliott I; Glass Lewis II; ISS; New York Comptroller II; Segal Marco II. 96 97 See letters from Bricklayers; CII IV; CIRCA; Glass Lewis II; ISS; New York Comptroller II; Segal Marco II. 98 See letter from CalPERS. 99 See Proposing Release at 66542, n.190. See letters from ProxyVote II; Segal Marco II. Similarly, another commenter noted that it executes votes directly on behalf of—but does not provide voting recommendations to—its clients. See letter from Mary Beth Gallagher, Executive Director, Investor Advocates for Social Justice (Feb. 3, 2020) (“IASJ”). See also letters from Sean P. Bannon, Chief Financial Officer, Felician Sisters of North America (Feb. 3, 2020) (“Felician Sisters II”); Toni Palamar, Province Business Administrator, Sisters of the Good Shepherd (Feb. 3, 2020) (“Good Shepherd”); Interfaith Center II; Patricia A. Daly, Corporate Responsibility Representative, Sisters of St. Dominic of Caldwell (Feb. 3, 2020) (“St. Dominic of Caldwell”). 100 See letters from 62 Professors; CalSTRS; Elliott I; Interfaith Center II; New York Comptroller II; Public Retirement Systems; Washington State Investment. 101 See letters from CalSTRS; CIRCA; Elliott I; Interfaith Center II; New York Comptroller II; Ohio Public Retirement; Prof. Sergakis; Public Retirement Systems. 102 30 increase litigation risks facing proxy voting advice businesses 103 and interfere with the relationship between investors and proxy voting advice businesses in a way that would increase costs and complexity and bias voting recommendations in favor of corporate management. 104 Two commenters further expressed concern that treating proxy advice as a solicitation could have a chilling effect on shareholder communication. 105 Some commenters asserted that the Commission has not provided reliable evidence that existing communications between proxy voting advice businesses and their institutional investor clients present a significant risk to investor protection to justify the proposed amendment.106 Several commenters expressed concern that the Commission disregarded the findings and views of its 2018 Roundtable on the Proxy Process, the Office of Investor Advocate, and the Investor Advisory Committee and called into question the legitimacy of other comment letters.107 One commenter requested that the Commission clarify the benefits of treating proxy advice as a solicitation. 108 Two commenters also expressed concern that the proposal would overlap with regulations that proxy voting advice businesses are already subject to, including as “investment advisers” under the Advisers Act and as fiduciaries under the Employee Retirement Income Security Act of 1974. 109 103 See letters from CIRCA; Elliott I; New York Comptroller II; Ohio Public Retirement; PRI II. 104 See letters from New York Comptroller II; PRI II. 105 See letters from CalPERS; Washington State Investment. 106 See letters from CII IV; Elliott I. 107 See letters from CII IV; Elliott I; Glass Lewis II; ISS. 108 See letter from CalPERS. 109 See letters from ISS; ProxyVote II. 31 Finally, some commenters that generally opposed the proposal recommended that, if the Commission ultimately decides to amend Rule 14a-1(l), it should make the following revisions to narrow the scope of the proposals: 110 • Clarify whether “proxy voting advice” under Rule 14a-1(l)(1)(iii)(A) would include data and research that may inform a proxy analysis or be described in a proxy research report but that is marketed separately to investors;111 • Exclude advice based on investors’ custom policies from the definition of “solicitation”; 112 • Modify the proposal to recognize the difference between proxy voting advice businesses and proxy voting agent businesses, the latter of which “vote solely on behalf of clients, in accordance with such clients’ preset voting guidelines, based upon thirdparty research” and should not be subject to regulation as a proxy voting advice business; 113 and • Clarify that the reference to “other forms of investment advice” in Proposed Rule 14a1(l)(1)(iii)(A) is not intended to exclude only advice from an “investment adviser” and thereby sweep into the scope of the term “solicitation” communications made in the normal course of business by other professionals (e.g., management-consulting firms, lawyers, accountants, broker-dealers, etc.). 114 110 See letters from CII IV; ISS; New York Comptroller II; PRI II; ProxyVote II; Segal Marco II. See letter from ISS. The commenter further opined that the inclusion of such data and research in the scope of “proxy voting advice” would be “highly inappropriate.” Id. 111 112 See letters from ISS; New York Comptroller II; Matthew DiGuiseppe, Head of Asset Stewardship, Americas, and Benjamin Colton, Head of Asset Stewardship, Asia Pacific, State Street Global Advisors (Feb. 3, 2020) (“State Street”). 113 See letter from Segal Marco II. 114 See letter from Hermes. 32 With respect to the proposed amendment to Rule 14a-1(l)(2), some commenters supported the proposal to exclude from the definition of a “solicitation” any proxy voting advice furnished by a person only in response to an unprompted request. 115 Another commenter, however, opposed the proposal, asserting that it would be unworkable because investment advisers and brokerdealers may be hesitant to announce a willingness to provide voting advice out of concern that the Commission would determine they had “invited and encouraged” their clients to ask for advice. 116 This commenter added that the proposed amendment would be counterproductive to investor protection goals because the Commission would be regulating experts with proxy advice-related skills and resources (i.e., proxy voting advice businesses), but would not regulate parties with no relevant expertise who engage in the same activities (i.e., any person that furnishes proxy voting advice in response to an unprompted request). 117 Finally, one commenter recommended that the Commission narrow the proposed exclusion to cover only proxy voting advice provided pursuant to an unprompted request “and not for compensation.” 118 3. Final Amendments We are adopting the amendments to Rule 14a-1(l)(1)(iii) and 17 CFR 240.14a-1(l)(2) (“Rule 14a-1(l)(2)”) as proposed, with some minor changes to the proposed amendment to Rule 14a-1(l)(1)(iii). 115 See letters from Andrew Cave, Head of Governance and Sustainability, Baillie Gifford & Co (Feb. 3, 2020) (“Baillie Gifford”); BRT; CCMC; Exxon Mobil; IBC. 116 See letter from ISS. 117 Id. 118 See letter from Exxon Mobil. 33 With respect to Rule 14a-1(l)(1)(iii), consistent with the Proposing Release, we are adding paragraph (A) 119 to make clear that the terms “solicit” and “solicitation” include any proxy voting advice 120 that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee. As noted above, the determination of whether a communication is a solicitation ultimately depends on the specific nature, content, and timing of the communication and the circumstances under which the communication is transmitted.121 A number of factors illuminate that determination, and, as set forth above, application of those factors indicate that the advice that proxy voting advice businesses provide to their clients generally constitutes a “solicitation.” 122 This amendment, therefore, codifies the Commission’s interpretation that proxy voting advice generally constitutes a “solicitation” under Rule 14a-1(l). 123 As we noted in the Proposing The amendment is intended to make clear that proxy voting advice provided under the specified circumstances constitutes a solicitation under current Rule 14a-1(l)(1)(iii). It is not intended to amend, limit, or otherwise affect the scope of Rule 14a-1(l)(1)(iii). 119 As noted above, one commenter requested clarification as to whether the term “proxy voting advice” would include data and research that may inform a proxy analysis or be described in a proxy research report but that is marketed separately to investors. See supra note 111 and accompanying text. We have clarified the scope of that term. Compare supra note 7, with Proposing Release at 66519 & n.11. 120 121 See supra note 75 and accompanying text. 122 See supra notes 75-79 and accompanying text; see also infra note 144. As noted above, some commenters expressed concern that the amendments are not supported by the relevant evidence and that the Commission may have disregarded the findings and views of more reliable observers, and called into question the legitimacy of other comments. See supra notes 106-107 and accompanying text. Very shortly after learning of the concerns raised about these comment letters, the Chairman referred the matter to the SEC’s Office of Inspector General to investigate. That investigation is ongoing. We have now learned that some of the commenters who submitted certain of the letters appear to have signed declarations provided to Members of Congress regarding the authenticity of those letters. Our decision to adopt the amendments to Rule 14a-1(l), is not predicated upon the input we received with respect to the quality of the services provided by proxy voting advice businesses or the independence thereof. Rather, these amendments largely codify the Commission’s longstanding interpretations of the scope of the terms “solicit” and “solicitation,” which, as discussed below, are based on an assessment of the text, structure, history, and purpose of Section 14(a) of the Exchange Act, as well as judicial precedent. See infra notes 132-156 and accompanying text. Moreover, although certain members of the Commission may have cited some of the 123 34 Release, we believe the furnishing of proxy voting advice by a person who has decided to offer such advice, separately from other forms of investment advice, to shareholders for a fee, with the expectation that its advice will be part of the shareholders’ voting decision-making process, is conducting the type of activity that raises the concerns about inadequate or materially misleading disclosures that Section 14(a) and the Commission’s proxy rules are intended to address. 124 We also believe that the regulatory framework of Section 14(a) and the Commission’s proxy rules, with their focus on the information received by shareholders as part of the voting process, are well-suited to enhancing the quality and availability of the information that clients of proxy voting advice businesses are likely to consider as part of their voting determinations. 125 In addition, we are aware of at least two proxy voting advice businesses, ISS and EganJones, that use more than one proprietary voting policy or set of guidelines—oftentimes, a letters described above during the Commission’s open meeting at which the amendments discussed herein were proposed, neither the Commission’s interpretations of the scope of the terms “solicit” and “solicitation,” nor our decision to adopt the other amendments herein, rest on those letters or their validity. Further, as discussed below, the Commission’s interpretations of the scope of the terms “solicit” and “solicitation” are longstanding and far predate the cited comment letters. See infra notes 150-154 and accompanying text. We understand that investment advisers may discuss their views on proxy voting with clients or prospective clients as part of their portfolio management services or other common investment advisory services. Such discussions could be unprompted or prompted (such as in the case of a client or prospective client that has asked the adviser for its views on a particular transaction). For example, a mutual fund board may request that a prospective subadviser discuss its views on proxy voting, including votes on particular types of transactions such as mergers or corporate governance. As noted in the Proposing Release, the amendment is not intended to include these types of communications as solicitations for purposes of Section 14(a). In response to certain comments we received, we also are clarifying the amendment is not intended to include communications made in the normal course of business by other professionals to their clients that may relate to proxy voting. Instead, the amendment is intended to apply to entities that market their proxy voting advice as a service that is separate from other forms of investment advice to clients or prospective clients and sell such advice for a fee. 124 We understand that a proxy voting advice business might, if applicable requirements are met, be registered as an investment adviser and subject to additional regulation under the Advisers Act, including 17 CFR part 275. However it is not unusual for a registrant under one provision of the securities laws to be subject to other provisions of the securities laws when engaging in conduct that falls within the other provisions. Given the focus of Section 14(a) and the Commission’s proxy rules on protecting investors who receive communications regarding their proxy votes, it is appropriate that proxy voting advice businesses be subject to applicable rules under Section 14(a) when they provide proxy voting advice. See supra notes 41-60 and accompanying text for a discussion of why we believe Section 14(a), together with the Commission’s proxy rules, is an appropriate regulatory regime for such communications by proxy voting advice businesses, regardless of whether they are registered under the Advisers Act. 125 35 benchmark policy and one or more specialty policies—in formulating proxy voting advice as to a particular matter to be voted on at a shareholder meeting (or for which written consents or authorizations are sought in lieu of a meeting). 126 Consistent with the Proposing Release, we view the proxy voting advice formulated pursuant to each separate policy or set of guidelines as distinct solicitations under Rule 14a-1(l)(1)(iii)(A). Similarly, as discussed in more detail below, 127 proxy voting advice formulated pursuant to a custom policy constitutes a distinct solicitation under the final rule as well. We recognize that some commenters opposed our amendments to Rule 14a-1(l)(1). As noted above, some commenters stated that the Commission is not authorized to regulate proxy voting advice as a “solicitation” under the Exchange Act.128 One commenter specifically asserted that the amendments would be contrary to (1) the legislative history of Section 14(a), (2) the case law that has construed the terms “solicit” and “solicitation” under Section 14(a) and Rule 14a-1(l), and (3) the plain meaning of the term “solicit.” 129 According to some opposing commenters, the scope of Section 14(a) is limited to soliciting activities by management, other corporate insiders, dissident shareholders seeking to take control of a company, or parties otherwise having an interest in the outcome of a shareholder vote. These commenters asserted, therefore, that as a matter of statutory interpretation, Section 14(a) cannot extend to communications or activities by persons who do not have an interest in the outcome of the matter being voted upon at the shareholder meeting or who do not seek proxy authority for themselves. 130 These commenters 126 See supra note 11 and accompanying text. 127 See infra notes 165-169 and accompanying text. 128 See supra notes 93-94 and accompanying text. 129 See letter from ISS. 130 See, e.g., supra notes 96-97 and accompanying text. 36 further assert that, as a matter of fact, proxy voting advice businesses satisfy both of these criteria (i.e., no interest in the outcome of a vote and no request for authority to vote). 131 We reject this narrow interpretation of Section 14(a). The Commission’s longstanding view that a “solicitation” includes any communication reasonably calculated to result in the procurement, withholding, or revocation of a proxy—and that this encompasses the furnishing of proxy voting advice—accords with the text, history, and structure of Section 14(a) of the Exchange Act, as well as judicial precedent and our own rules. The structure of Section 14(a) grants the Commission broad authority. It authorizes the Commission to prescribe rules and regulations to govern proxy solicitations “as necessary or appropriate in the public interest or for the protection of investors,” and it makes it unlawful for any person to “solicit any proxy” with respect to any security registered under Section 12 of the Exchange Act in contravention of such rules and regulations. 132 Furthermore, rather than defining what constitutes a proxy solicitation, the Exchange Act leaves those terms undefined, while at the same time specifically empowering the Commission to define such terms consistent with the Act’s “provisions and purposes” 133 and, more broadly, to make rules and regulations, including rules that classify “transactions, statements, applications, reports, and other materials.” 134 In light of that context, the phrase “solicit any proxy” is not as narrow or mechanical as some commenters have claimed. Citing a dictionary definition, one commenter suggested that the 131 Id. See S. Rep. No. 73-792, 2d Sess., at 12 (1934) (“The committee recommends that the solicitation and issuance of proxies be left to regulation by the Commission.”); H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934) (explaining the intention to give the Commission the “power to control the conditions under which proxies may be solicited”). 132 133 15 U.S.C. 78c(b). 134 15 U.S.C. 78w(a)(1). 37 ordinary meaning of the term “solicit” is “to endeavor to obtain.” 135 Under this definition, what matters is the subjective intent of the person engaging in the solicitation, and thus no person would be soliciting a proxy unless they intend to obtain proxy authority. Some commenters likewise claimed that no person would be soliciting a proxy unless they intend to obtain a shareholder’s support for a preferred outcome. 136 However, dictionaries at the time Section 14(a) was enacted indicate that the term “solicit” had other meanings that did not depend on the interest or subjective intent of the person engaging in the solicitation. The term “solicit” also meant “[t]o move to action.” 137 Under this definition, what matters is not the subjective intent to obtain a proxy, but rather the effect on a recipient’s proxy vote. A person solicits a proxy by influencing a shareholder to act. As between these two meanings, we view the latter as more consistent with Section 14(a)’s provisions and purposes, as any inducement that may move a shareholder to vote a proxy in a certain way implicates the Commission’s charge to ensure that necessary and appropriate regulations are in place for the protection of investors. That is why the Commission has recognized since 1956 that persons who do not seek proxy authority themselves nevertheless engage in solicitation when they communicate with shareholders in a manner reasonably calculated to “result” in a proxy vote. The context and history of Section 14(a) accord with this conclusion. Congress considered different versions of the Exchange Act that set forth the applicable proxy standards with more specificity in the analog to Section 14(a) and rejected them in favor of the broad authority granted 135 See letter from ISS. See, e.g., supra notes 96-97 and accompanying text. In arguing that the plain meaning of “solicit” supports its view, one commenter relied on the dictionary definition “to endeavor to obtain,” even though the commenter elsewhere acknowledged that Section 14(a) has long been understood to encompass communications that do not seek to obtain a proxy—and thus would not meet that narrow definition. See letter from ISS. 136 See WEBSTER’S NEW INTERNATIONAL DICTIONARY (2d ed. 1934) (providing multiple definitions of the term “solicit,” including “[t]o move to action” or “[t]o urge” or “insist upon”). 137 38 to the Commission in Section 14(a), as enacted. 138 While Congress may have been motivated to enact Section 14(a) in 1934 due to the particular abuses by corporate insiders or dissident shareholders that occurred during that time, nothing in either the text or legislative history of Section 14(a) indicates that Congress intended to limit its scope to solicitations conducted by those parties. Rather, where Congress intended to exempt certain classes of market participants, transactions, or activities from the statutory provisions of the Securities Act and the Exchange Act (as enacted in 1933 and 1934, respectively) or limit the Commission’s rulemaking authority with regard to those market participants, transactions or activities, it generally did so by expressly including language in the relevant statutory provision. 139 Indeed, Section 14(a) itself excludes any “exempted security” from its scope, but otherwise facially applies to “any person” without carving out any class of market participants. 140 Nor does the case law construing Section 14(a) mandate that a party must have an “interest” in the outcome of a shareholder vote in order for a solicitation to occur, as certain See LOUIS LOSS ET. AL., SECURITIES REGULATION, § 6.C.2 (6th ed. 2018) (“In §14(a) of the Exchange Act, Congress, abandoning the more specific standards of the original bills, left the solicitation of proxies to the SEC under broad public interest standards.”) (citing S. 2693, H.R. 7852, 73d Cong., 2d Sess. § 13(a) (1934)). 138 See, e.g., Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 881, § 3(a)(4) (1934) (“Exchange Act (as enacted in 1934)”) (stating that the definition of the term “broker” “does not include a bank”); Exchange Act (as enacted in 1934) § 3(a)(5) (stating that the definition of the term “dealer” “does not include a bank, or any person insofar as he buys or sells securities for his own account, either individually or in some fiduciary capacity, but not as part of a regular business”); Exchange Act (as enacted in 1934) § 3(a)(10) (defining the term “security” but expressly stating that the term “shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited”); Exchange Act (as enacted in 1934) § 15(l) (restricting broker-dealers’ overthe-counter market activity, but expressly exempting from these restrictions certain exempt securities, commercial paper, and other instruments); Exchange Act (as enacted in 1934) § 24(a) (limiting the Commission’s authority to require the “revealing of trade secrets or processes in any application, report, or document filed with the Commission under this title”); Securities Act of 1933, Pub. L. No. 73-22, 48 Stat. 74, § 2(a)(10) (1933) (“Securities Act (as enacted in 1933)”) (defining the term “prospectus” and expressly excluding certain written communications from this definition); Securities Act (as enacted in 1933) § 2(a)(11) (carving out from the statutory definition of “underwriter” any “person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission”); Securities Act (as enacted in 1933) § 2(a)(3) (carving out from the statutory definition of the terms “sale”, “sell”, “offer to sell”, and “offer for sale” “preliminary negotiations or agreements between an issuer and any underwriter”). 139 140 See 15 U.S.C. 78n(a). 39 commenters contended. 141 Courts have articulated a broad definition of the term “solicit” such that the proxy rules “apply not only to direct requests to furnish, revoke, or withhold proxies, but also to communications which may indirectly accomplish such a result or constitute a step in the chain of communications ultimately designed to accomplish such a result.” 142 Moreover, relying on the “subjective intent of the person furnishing the communication” to determine whether a particular communication constitutes a solicitation “is at odds with the plain and unambiguous meaning of the regulation.” 143 Instead, the phrase “reasonably calculated to result in the procurement, withholding or revocation of a proxy” in Rule 14a-1(l)(1)(iii) requires an objective inquiry that focuses “on the manner in which the communicator attempted to influence a shareholder’s proxy decision from the perspective of the shareholder who received the material.” 144 Courts also have broadly understood a “solicitation” to encompass “communications See, e.g., letter from ISS. Although we do not believe that Section 14(a) requires that a party have an interest in the outcome of a vote, we also do not accept commenters’ assertion that, as a matter of fact, proxy voting advice businesses necessarily do not have an interest in the outcome of matters being voted upon at shareholder meetings or do not seek proxy authority for themselves. While this may be true in many instances, we do not think this is always the case. See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-17-47, REPORT TO THE CHAIRMAN, SUBCOMMITTEE ON ECONOMIC POLICY, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, U.S. SENATE, CORPORATE SHAREHOLDER MEETINGS: PROXY ADVISORY FIRMS’ ROLE IN VOTING AND CORPORATE GOVERNANCE PRACTICES, 18 (2016), available at https://www.gao.gov/assets/690/681050.pdf (“2016 GAO Report”) (“Officials from one proxy advisory firm with whom we spoke stated that they agree that proxy advisory firms have influence on corporate governance practices. . . . They noted that such influence is good and ultimately they want to have a positive influence on their clients because they view that as part of their responsibility—to promote good governance.”); Kevin E. McManus, CEO Compensation was a Joke Before Covid-19, Now It is Just Obnoxious, EGAN-JONES PROXY SERVICES (June 11, 2020), https://www.ejproxy.com/weekly-wreck/36/ceo-compensation-was-joke-covid-19-now-it-justobnoxious/ (criticizing executive compensation at certain registrants and making policy-based recommendations to regulate executive compensation). See also infra Section II.B.1. (noting examples of circumstances where the interests of a proxy voting advice business may diverge materially from the interests of the clients who utilize their advice, including a proxy voting advice business providing advice on a matter in which its affiliates or one of its clients has a material interest, such as a business transaction or a shareholder proposal put forward by or actively supported by that client). 141 Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d Cir. 1985) (emphasis added); see also Capital Real Estate Inv'rs Tax Exempt Fund Ltd. P'ship v. Schwartzberg, 917 F.Supp. 1050, 1059 (S.D.N.Y. 1996). 142 143 Gas Natural Inc. v. Osbourne, 624 Fed. Appx. 944, 950 (6th Cir. 2015) (unpublished). Id. (citing Broker-Dealer Release at 342 (noting that communications from broker-dealers to shareholders “may constitute a solicitation requiring compliance with the proxy rules” depending “upon the content of the material, upon the conditions under which it is transmitted, and upon surrounding circumstances”)). See also Long Island Lighting Co., 779 F.2d at 796 (“Determination of the purpose of the communication depends upon the nature of the communication and the circumstances under which it was distributed.”); Sargent v. Genesco, Inc., 492 F.2d 750, 767 144 40 which may indirectly [result in a proxy being furnished, revoked or withheld],” 145 an interpretation that does not, by its terms, require inquiry into the speakers’ interest or subjective intention. To inject a subjective element into the test of whether a communication is a “solicitation” under Rule 14a-1(l)(1)(iii) as argued by one commenter (i.e., determining whether the speaker is “completely indifferent to the outcome of the matter as to which shareholder approval was sought” 146) runs counter to this case law. Relying on its broad rulemaking authority, the Commission has since 1956 defined a solicitation to include any “communication to security holders under circumstances reasonably calculated to result in the procurement, execution, or revocation of a proxy.” 147 This definition advances Section 14(a)’s overarching purpose of ensuring that communications to shareholders about their proxy voting decisions contain materially complete and accurate information. 148 It (5th Cir. 1974) (“Whether or not a particular communication is a solicitation within the meaning of 14(a) is a question of fact dependent upon the nature of the communication and the circumstances under which it is transmitted.”); Dyer v. SEC, 291 F.2d 774, 777-78 (8th Cir. 1961) (indicating that the determination of whether a communication constitutes a solicitation depends on the “nature and circumstances” of a communication and whether it can be rationally inferred that the speaker “knew or could be expected to foresee that the things which he said might on their implication and innuendo affect the action of a stockholder in his granting of proxy authority,” regardless of “whatever [the speaker] may have had in his mind”); Schwartzberg, 929 F.Supp. at 113-14 (noting that if a statement “presents the transaction in a manner objectively likely to predispose security holders toward or against it . . . it must comply with the proxy rules”). Among the factors relevant to the objective inquiry into whether a communication constitutes a “solicitation” are (1) “the contents of the communication,” (2) “the conditions under which the communication is distributed,” and (3) “[t]he timing of the communication in relation to the relevant surrounding circumstances.” Gas Natural Inc., 624 Fed. Appx. at 950. As described above, the proxy voting advice that proxy voting advice businesses send their clients generally constitutes “solicitations” under each of those three factors. See supra notes 75-79 and accompanying text. 145 Long Island Lighting Co., 779 F.2d at 796. 146 See letter from ISS. 147 17 CFR 240.14a-1(l)(1)(iii). Borak, 377 U.S. at 432; see also S. Rep. No. 1455, 73d Cong., 2d Sess., 74 (1934) (“In order that the stockholder may have adequate knowledge as to the manner in which his interests are being served, it is essential that he be enlightened not only as to the financial condition of the corporation, but also as to the major questions of policy, which are decided at stockholders’ meetings.”); H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934) (explaining the need for “adequate disclosure” and “explanation”); Communications Among Shareholders Adopting Release at 48277. 148 41 would be inconsistent with that goal if a person whose business is to offer and sell voting advice broadly to large numbers of shareholders, with the expectation that their advice will factor into shareholders’ voting decisions, were beyond the reach of Section 14(a). The fact that shareholders may retain providers of proxy voting advice to advance their own interests does not obviate these concerns. As described above, some commenters also asserted that the proposed amendment to Rule 14a-1(l)(1)(iii) conflicts with well-established practice in the proxy voting advice business industry and the Commission’s historical treatment thereof. 149 As an initial matter, and as noted in the Interpretive Release and the Proposing Release, the amendment to Rule 14a-1(l)(1)(iii) is in accordance with, and represents a codification of, the Commission’s longstanding view that proxy voting advice generally constitutes a “solicitation.” This view was originally set forth in a 1964 release 150 and reiterated by the Commission in 1979 151 and 2010. 152 The cited releases did not limit the scope of the term “solicitation” so as to exclude proxy voting advice provided by “disinterested persons.” Instead, the Commission articulated its view that proxy voting advice generally constitutes a “solicitation,” without reference to a particular class of market participants that must be providing such advice. 153 Any suggestion otherwise requires reading into the releases 149 See supra note 95 and accompanying text. See Broker-Dealer Release at 341 (“Material distributed during a period while proxy solicitation is in progress, which comments upon the issues to be voted on or which suggests how the stockholder should vote, would constitute soliciting material.”). 150 See 1979 Adopting Release at 68766; Shareholder Communications, Shareholder Participation in the Corporate Electoral Process and Corporate Governance Generally, Release No. 34-16104 (Aug. 13, 1979) [44 FR 48938 (Aug. 20, 1979)], at 48941 n.25. 151 Concept Release at 43009 (“As a general matter, the furnishing of proxy voting advice constitutes a ‘solicitation’ subject to the information and filing requirements in the proxy rules.”). 152 Although the Commission’s view was originally articulated in the context of an opinion by its General Counsel regarding participation by broker-dealer firms in proxy solicitations, nothing in the language of that release indicates that its position could not also be extended to other independent, disinterested parties engaged in the same activity. See Broker-Dealer Release. 153 42 an additional qualification that the Commission did not articulate. 154 We further note that these commenters’ position is inconsistent with the treatment of other disinterested parties under the current proxy regulatory scheme. Shareholders today exercise their voting rights through an intricate proxy process involving numerous intermediaries, such as broker-dealers, that each play an important role. Most shareholders own their securities in “street name,” with their broker-dealers and banks generally holding the securities in their name on behalf of their customers and possessing the legal authority to vote those shares. Under the current proxy process and rules, these broker-dealers and banks must forward a company’s proxy materials to their customers and seek voting instructions (often called “voting instruction forms”) from the customers on whose behalf they hold those shares. These activities are currently treated as solicitations under the proxy rules, with the Commission generally exempting them from the informational and filing requirements, despite the fact that the broker-dealers and banks have no interest in the outcome of the matters being presented for a vote and no involvement in the preparation of the materials being sent to the customers. 155 Those who have considered the issue, The commenters also cite the 1979 and 1992 releases as evidence that the Commission intended to narrow the scope of the term “solicitation” so as to avoid including communications by disinterested fiduciaries. See, e.g., letter from ISS (citing Communications Among Shareholders Adopting Release; 1979 Adopting Release). However, those releases reinforced the Commission’s view of the breadth of the term by creating additional exemptions from the proxy filing rules. See Communications Among Shareholders Adopting Release at 48278 (creating an exemption from the proxy filing rules for solicitations by persons not seeking proxy authority who do not have a substantial interest in the matter subject to a vote); 1979 Adopting Release at 68766-67 (creating an exemption from the proxy filing rules for voting advice provided to persons with whom a financial advisor has a business relationship). In other words, the Commission recognized that certain classes of market participants were conducting activities that constituted “solicitations,” but sought to grant them relief from the proxy filing rules by adopting applicable exemptions. Had the Commission interpreted the term “solicitation” as not applying to those market participants’ activities, no such exemption from the proxy filing rules would have been necessary in the first place. Also, had the Commission intended to narrow the scope of the term “solicitation” to avoid its application to those classes of market participants, it would have amended the definition thereof in Rule 14a-1(l) appropriately. In fact, in the 1992 release, the Commission acknowledged that even though it considered (but did not ultimately adopt) proposed amendments exempting from the proxy filing rules all communications by “‘disinterested’ persons who are not seeking proxy authority,” such communications under that proposal would still have constituted “solicitations” and “remained subject to antifraud standards.” Communications Among Shareholders Adopting Release at 48278. 154 See 17 CFR 240.14a-2(a)(1); see also Jill E. Fisch, Standing Voting Instructions: Empowering the Excluded Retail Investor, 120 MINN. L. REV. 11, 40-41 (2017) (noting that broker-dealers’ requests for voting instructions from their 155 43 including at least one court, have recognized that the forwarding of a company’s proxy materials and requests for voting instructions by broker-dealers constitute a form of soliciting activity subject to the Commission’s rules. 156 In addition, market observers, including proxy voting advice businesses themselves, have long recognized that the provision of proxy voting advice may constitute a “solicitation” subject to the proxy rules. 157 Notably, one proxy voting advice business that now argues that the Commission lacks authority to regulate proxy voting advice as a “solicitation” submitted a letter to the Division of Corporation Finance in 1988 requesting no-action relief from the Commission’s proxy filing rules. 158 The proxy voting advice business did not request relief on the basis that its proxy voting advice should not be considered a “solicitation.” Instead, the letter appears to customers “fall[] within the SEC’s definition of a proxy solicitation” and that Rule 14a-2(a)(1) “exempts the broker from the filing requirements and the obligation to furnish a proxy statement”). See, e.g., Walsh & Levine v. The Peoria & E. R. Co., 222 F.Supp. 516, 518-19 (S.D.N.Y. 1963) (“[I]f brokers transmit some but not all proxy solicitations to those for whose benefit they hold in street name, they are acting in contravention of the Commission rules if they fail to fulfill the duties required of active proxy solicitors.”); BrokerDealer Release at 342 (“[I]t is quite clear . . . that the transmission to customers of proxy material furnished by the issuer or any other person who is soliciting a proxy, is clearly itself the solicitation of a proxy, since the material is transmitted under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.”); Fisch, supra note 155 at 40; Council of Institutional Investors, Client Directed Voting: Selected Issues and Design Perspectives (August 2010) (“Rule 14a-(l) under the Exchange Act defines solicitation to include the ‘furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy,’ subject to certain exceptions. Communications sent by brokers to encourage participation in a [client directed voting] model would appear to fall within this definition absent an exemption, and the SEC staff agrees with this conclusion. As such, brokers would have to comply with the proxy solicitation rules, including principally the disclosure and SEC filing requirements applicable to proxy materials.”). 156 See, e.g., Sagiv Edelman, Proxy Advisory Firms: A Guide for Regulatory Reform, 62 EMORY L.J. 1369, 1378 (2013) (“Due to the expansive definition of solicitation, proxy advisory firms would be subject to federal proxy rules if not for the exemption found in Exchange Act Rule 14a-2(b)(3).”); Douglas G. Smith, A Comparative Analysis of the Proxy Machinery in Germany, Japan, and the United States: Implications for the Political Theory of American Corporate Finance, 58 U. PITT. L. REV. 145, 201 n.284 (1996) (“Furnishing of proxy voting advice by an investment advisor is exempt [from the proxy filing rules] under certain circumstances.”); John C. Coffee, Jr., Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 COLUM. L. REV. 1277, 1358 (1991) (“The legal issue is whether the provision of proxy advice amounts to a proxy ‘solicitation’ under SEC Rule 14a-1. Clearly, the definition of solicitation reaches this far . . . .”); Bernard S. Black, Shareholder Passivity Reexamined, 89 MICH. L. REV. 520, 530 (1990) (“Nor are the Proxy Rules limited to communications by the contestants. A third party who proffers voting advice is ‘soliciting’ votes.”). See also infra notes 158-161 and accompanying text. 157 158 Institutional Shareholder Services, Inc., 1991 SEC No-Act. LEXIS 17 (Dec. 15, 1988). 44 implicitly assume that such advice could be a “solicitation” by requesting relief from the proxy filing rules under the predecessor exemption to current Rule 14a-2(b)(3) on the basis that its proxy voting advice was provided to persons with whom it had a business relationship. 159 Further, as recently as 2016, the CEO of another proxy voting advice business testified that “[p]roxy advisory firms also are subject to the Securities and Exchange Commission’s proxy solicitation rules under the [Exchange Act].”160 The CEO further testified that “proxy voting advisors operating today . . . are generally deemed by the SEC as qualifying for the exemptions based on rules 14a-2(b)(1) and 14a-2(b)(3).”161 These statements suggest that the proxy voting advice business industry has understood for over 30 years that its proxy voting advice constitutes a “solicitation” under Rule 14a-1(l), or at least that the Commission may consider their proxy voting advice to constitute a “solicitation.” Some commenters also asserted that our amendments to Rule 14a-1(l)(1)(iii) will increase proxy voting advice businesses’ costs or interfere with their ability to provide services to their clients. Specifically, commenters indicated that the amendments could increase litigation risks for proxy voting advice businesses or have a chilling effect on shareholder communications. 162 Although we acknowledge that compliance with the new conditions we are adopting to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3) may increase the resources that proxy voting advice businesses apply to ensuring compliance with applicable law and regulation, 163 we disagree 159 See id. Katherine H. Rabin, Chief Executive Officer, Glass, Lewis & Co., Statement to the U.S. House of Representatives Committee on Financial Services: Markup of H.R. 5983, the “Financial CHOICE Act of 2016,” at 3 (September 13, 2016), available at https://www.glasslewis.com/wp-content/uploads/2016/09/2016_0912_Glass-Lewis-Statement-reH.R.-5983_final.pdf. 160 161 Id. 162 See supra notes 101-105 and accompanying text. 163 See infra Section IV. 45 that our amendments to Rule 14a-1(l)(1)(iii), taken in isolation, will have a material impact on the operation of a proxy voting advice business. 164 To the contrary, the fact that both the Commission and the market generally, including proxy voting advice businesses, have long recognized that proxy voting advice generally constitutes a “solicitation” indicates that any impact from codifying this aspect of the definition of a solicitation likely is already reflected in the manner in which proxy voting advice businesses’ provide their services and the pricing thereof. Finally, in the Interpretive Release, we stated our view that proxy voting advice based on a proxy voting advice business’s application of custom policies generally should be considered a “solicitation” under Rule 14a-1(l). 165 We continue to hold that view for the reasons stated in the Interpretive Release. As a result, such proxy voting advice is subject to Rule 14a-9, and p [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A071c560d5b704463. Public record. Not legal advice.