Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice

Federal RegisterDec 4, 2019

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-87457; File No. S7-22-19]

RIN 3235-AM50

Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing amendments to its rules governing proxy solicitations to help ensure that investors who use proxy voting advice receive more accurate, transparent, and complete information on which to make their voting decisions, in a manner that does not impose undue costs or delays that could adversely affect the timely provision of proxy voting advice. The proposed amendments would condition the availability of certain existing exemptions from the information and filing requirements of the federal proxy rules for proxy voting advice businesses upon compliance with additional disclosure and procedural requirements. In addition, the proposed amendments would 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 proposed amendments would amend the proxy rules to clarify when the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the rule, depending upon the particular facts and circumstances at issue.

DATES:

Comments should be received by February 3, 2020.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

https://www.sec.gov/rules/submitcomments.htm

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-22-19 on the subject line.

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-19. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's website (

http://www.sec.gov/rules/proposed.shtml

). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Daniel S. Greenspan, Senior Counsel, Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are proposing amendments to 17 CFR 240.14a-1(

) (“Rule 14a-1(

)”), 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”).

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.

Table of Contents

I. Introduction

II. Discussion of Proposed Amendments

A. Proposed Codification of the Commission's Interpretation of “Solicitation” Under Rule 14A-1(l) and Section 14(a)

B. Proposed Amendments to Rule 14a-2(b)

1. Conflicts of Interest

2. Registrants' and Other Soliciting Persons' Review of Proxy Voting Advice and Response

C. Proposed Amendments to Rule 14a-9

D. Transition Period

III. Economic Analysis

A. Introduction

1. Overview of Proxy Voting Advice Businesses' Role in the Proxy Process

B. Economic Baseline

1. Affected Parties and Current Regulatory Framework

2. Certain Industry Practices

C. Benefits and Costs

1. Benefits

2. Costs

D. Effects on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

E. Reasonable Alternatives

1. Require Proxy Voting Advice Businesses To Include Full Registrant Response in the Businesses' Voting Advice

2. Different Timing for, or Number of, Reviews

3. Public Disclosure of Conflicts of Interest

4. Require Additional Mandatory Disclosures in Proxy Voting Advice

5. Require Disabling of Pre-Populated and Automatic Voting Mechanisms

6. Exempt Smaller Proxy Voting Advice Businesses From the Additional Conditions to the Exemptions

IV. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments

V. Small Business Regulatory Enforcement Fairness Act

VI. Initial Regulatory Flexibility Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

VII. Statutory Authority

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. For various reasons, including the widely dispersed nature of public share ownership, most shareholders do not attend these meetings in person. Proxies are the means by which most shareholders of publicly traded companies exercise their right to vote on corporate matters.

Congress vested in the Commission the broad authority to oversee the proxy solicitation process when it originally enacted the Exchange Act in 1934.

the securities markets have become increasingly more sophisticated and complex, and the intermediation of share ownership and participation of various market participants has grown in kind,

the Commission's interest in ensuring fair, honest and informed markets, underpinned by a properly functioning proxy system, dictates that we regularly assess whether the system is serving investors as it should.

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.

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' . . . .”).

See

Concept Release,

supra

note 2, 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 . . .”).

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.”).

One of the defining characteristics of today's market is the significant role played by institutional investors,

which today own, by some estimates, between 70 and 80 percent of the market value of U.S. public companies.

Investment advisers voting on behalf of clients and other institutional investors, by virtue of their significant holdings (often on behalf of others, including retail investors) in many public companies, must manage the logistics of voting in potentially hundreds, if not thousands, of 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.

See generally

Janette Rutterford & Leslie Hannah,

The Rise of Institutional Investors,

Financial Market History: Reflections on the Past of Investors Today (David Chambers & Elroy Dimson eds., 2017); Lucian A. Bebchuk, Alma Cohen & Scott Hirst,

The Agency Problems of Institutional Investors,

31 J. Econ. Perspectives, Summer 2017, at 89; Marshall E. Blume & Donald B. Keim,

Institutional Investors and Stock Market Liquidity: Trends and Relationships,

SSRN Electronic Journal (2012),

available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2147757.

Compare

Charles McGrath,

80% of equity market cap held by institutions,

Pensions & Investments (Apr. 25, 2017),

https://www.pionline.com/article/20170425/INTERACTIVE/170429926/80-of-equity-market-cap-held-by-institutions, with

Broadridge & PwC,

2018 Proxy Season Review,

ProxyPulse 1 (Oct. 2018),

https://www.pwc.com/us/en/governance-insights-center/publications/assets/pwc-broadridge-proxypulse-2018-proxy-season-review.pdf

(estimating that institutions own 70% of public company shares). This report also notes that institutional investors have significantly higher voter participation rates than retail investors, casting votes representing 91 percent of all the shares they held in 2018, compared to only 28 percent for retail investors during the same period.

Id.

at 2.

The Investment Company Institute (“ICI”) has stated that during the 2017 proxy season, registered investment funds cast more than 7.6 million votes on 25,859 proxy proposals on corporate proxy ballots and that the average mutual fund voted on 1,504 separate proxy proposals for U.S.-listed portfolio companies (figures exclude companies domiciled outside the U.S.).

See

Morris Mitler et al.,

Funds and Proxy Voting: The Mix of Proposals Matters,

Investment Company Institute (Nov. 5, 2018),

https://www.ici.org/viewpoints/view_18_proxy_environment;

Letter from Paul Schott Stevens, President and CEO of ICI (March 15, 2019) (“ICI Letter”), at 3. In addition, the Ohio Public Employees Retirement System has noted that it receives in excess of 10,000 proxies in any given proxy season.

See

Letter from Karen Carraher, Executive Director & Patti Brammer, Corporate Governance Officer, Ohio Public Employees Retirement System (Dec. 13, 2018) (“OPERS Letter”), at 2. Unless otherwise indicated, comment letters cited in this release are to the Commission's Roundtable on the Proxy Process held Nov. 15, 2018 (“2018 Proxy Roundtable”),

available at https://www.sec.gov/proxy-roundtable-2018.

Investment advisers and other institutional investors often retain proxy advisory firms to assist them in making their voting determinations on behalf of clients and to handle other aspects of the voting process.

For purposes of this release, we refer to these firms and any person who markets and sells proxy voting 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, along with the analysis and research underlying the voting recommendations, and 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.

See generally

GAO Report to Congress,

Corporate Shareholder Meetings—Proxy Advisory Firms' Role in Voting and Corporate Governance Practices

(Nov. 2016) (“2016 GAO Report”); GAO Report to Congress,

Corporate Shareholder Meetings—Issues Relating to Firms that Advise Institutional Investors on Proxy Voting

(June 2007) (“2007 GAO Report”);

see also Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers,

Release No. IA-5325 (Aug. 21, 2019) [84 FR 47420 (Sept. 10, 2019)] (“Commission Guidance on Proxy Voting Responsibilities”), at 5; Letter from Gary Retelny, President and CEO of Institutional Shareholder Services, Inc. (Nov. 7, 2018) (“ISS Letter”), at 1.

See

proposed Rule 14a-1(l)(iii)(A).

The reference to “proxy voting advice,” as used in this release, is not intended to encompass (1) research reports or data that are not used to formulate the voting recommendations or (2) administrative or ministerial services.

Proxy voting advice businesses typically provide institutional investors and other clients a variety of services that relate to the substance of voting, such as: Providing research and analysis regarding the matters subject to a vote; promulgating general voting guidelines that their clients can adopt; and making voting recommendations to their clients on specific matters subject to a shareholder vote, either based on the proxy voting advice business's own voting guidelines or on custom voting guidelines that the client has created.

This advice is often an important factor in the clients' proxy voting decisions. Clients use the information to obtain a more informed understanding of different proposals presented in the proxy materials, and as an alternative or supplement to using their own internal resources when deciding how to vote.

ISS Letter,

supra

note 9.

See

Commission Guidance on Proxy Voting Responsibilities,

supra

note 9 (“Contracting with proxy advisory firms to provide these types of functions and services can reduce burdens for investment advisers (and potentially reduce costs for their clients) as compared to conducting them in-house.”);

see also

OPERS Letter,

supra

note 8, at 1 (“However, with limited staff and resources, it is extremely difficult to devote the necessary time and attention to the thousands of proxies we receive each proxy season. Consequently, OPERS has chosen to partner with a proxy advisory firm, which allows us to fulfill our engagement and governance obligations in a more productive and efficient manner.”); Letter from Kenneth A. Bertsch, Executive Director, Council of Institutional Investors (Nov. 8, 2018) (“CII Letter”), at 16 (“Proxy research firms, while imperfect, play an important and useful role in enabling effective and cost-efficient independent research, analysis and informed proxy voting advice for large institutional shareholders, particularly since many funds hold shares of thousands of companies in their investment portfolios.”).

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.

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.

One way a proxy voting advice business may assist clients with voting execution is through an electronic vote management system that allows the proxy voting advice business to (1) populate each client's ballots with recommendations

based on that client's voting instructions to the business (“pre-population”); and (2) submit the client's ballots to be counted. Clients utilizing such services may choose to review the proxy voting advice business's pre-populated ballots before they are submitted or to have them submitted automatically, without further client review (“automatic submission”).

See

Commission Guidance on Proxy Voting Responsibilities,

supra

note 9.

Id.

See, e.g.,

Letter from Katherine Rabin, Chief Executive Officer, Glass, Lewis & Co., LLC (Nov. 14, 2018) (“Glass Lewis Letter”), at 2, 4 (describing how ballots are populated and submitted).

Proxy voting advice businesses play an integral role in the proxy voting process by providing an array of voting services that can help clients manage their proxy voting needs and make informed investment decisions.

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 that are voted annually.

Accordingly, proxy voting advice businesses are uniquely situated in today's market to influence these investors' voting decisions.

Id.; see

Letter from Yves P. Denizé, Senior Managing Director, Teachers Insurance and Annuity Association of America (June 10, 2019) (“TIAA Letter”), at 3, 6, 7 (“Proxy advisory services are a crucial part of [TIAA's] voting process. . . . Every year, [TIAA] completes a proxy voting review of more than 3,000 U.S. and 11,000 global companies and processes more than 100,000 unique agenda items. . . . [W]e rely on proxy advisory firms to gather and synthesize the information we need to make informed voting decisions in a timely and efficient manner.”); Letter from Michael Garland, Assistant Comptroller, Office of N.Y.C. Comptroller (Jan. 2, 2019) (“NYC Comptroller Letter”), at p. 4 of enclosed statement before the Senate Banking Committee on Dec. 8, 2018 (“During the peak of U.S. proxy season . . . the number of meetings and votes is very large, putting a premium on having a high-quality, efficient process, to which the proxy advisory firms are indispensable.”); OPERS Letter,

supra

note 8, at 2 (“OPERS receives in excess of 10,000 proxies in any given proxy season. We have determined it is more operationally efficient to use the workflow of our proxy advisory firm to cast votes on these matters.”); Letter from Gail C. Bernstein, General Counsel, Investment Adviser Association (Dec. 31, 2018) (“IAA Letter”), at 2 (“[P]roxy advisory firms . . . provide important support, particularly voting-related administration services. Indeed, investment advisers of all sizes would face extreme logistical difficulty if they were unable to use these services to assist in the mechanics of voting proxies and for research.”).

One major proxy voting advice business, Institutional Shareholder Services, Inc. (“ISS”), reported that it had approximately 2,000 institutional clients.

See The ISS Advantage,

Institutional Shareholder Services,

available at https://www.issgovernance.com/about/about-iss/

(last visited Sept. 20, 2019). Another major firm, Glass, Lewis & Co., LLC (“Glass Lewis”), reported that, as of 2019, it had “1,300+ clients, including the majority of the world's largest pension plans, mutual funds, and asset managers, who collectively manage more than $35 trillion in assets.”

See Company Overview,

Glass Lewis,

available at https://www.glasslewis.com/company-overview/

(last visited Sept. 20, 2019).

Given these market realities, it is vital that proxy voting advice be based on the most accurate information reasonably available and that the businesses providing such advice be sufficiently transparent with their clients about the processes and methodologies used to formulate the advice.

This is especially true when proxy voting advice businesses provide advice to investment advisers, which often make voting determinations on behalf of investors. The Commission has a strong interest in protecting those investors by ensuring that information provided by proxy voting advice businesses enables investment advisers to make informed voting determinations on investors' behalf.

In this regard, because proxy voting advice provided by proxy voting advice businesses generally constitutes a “solicitation” subject to the federal proxy rules,

it is important that our rules governing the proxy solicitation process are working to achieve these goals. In recent years, registrants, investors, and others have expressed concerns about proxy voting advice businesses.

As described in more detail below, these concerns have focused on the accuracy and soundness of the information and methodologies used to formulate proxy voting advice businesses' recommendations as well as potential conflicts of interest that may affect those recommendations. Given proxy voting advice businesses' potential to influence the voting decisions of investment advisers and other institutional investors,

who often vote on behalf of others, we are concerned about the risk of proxy voting advice businesses providing inaccurate or incomplete voting advice (including the failure to disclose material conflicts of interest) that could be relied upon to the detriment of investors. In light of these concerns, we are proposing amendments to the federal proxy rules that are designed to enhance the accuracy, transparency of process, and material completeness of the information provided to clients of proxy voting advice businesses when they cast their votes, as well as amendments to enhance disclosures of conflicts of interest that may materially affect the proxy voting advice businesses' voting advice.

See, e.g.,

Concept Release,

supra

note 2, at 8 (“[T]he proxy system involves a wide array of third-party participants . . . including proxy advisory firms . . . the increased reliance on these third parties . . . adds complexity to the proxy system and makes it less transparent to shareholders and to issuers.”). The Commission has previously conducted rulemaking in this area, as well as engaged with the public through various forums and statements on these issues.

See, e.g., 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”); 2018 Proxy Roundtable,

supra

note 8;

2013 Roundtable on Proxy Advisory Services

(Dec. 5, 2013),

available at https://www.sec.gov/spotlight/proxy-advisory-services.shtml;

Proxy Voting by Investment Advisers,

Release No. IA-2106 (Jan. 31, 2003), 68 FR 6585 (Feb. 7, 2003) (“2003 Proxy Voting Release”).

In addition, the Commission recently issued guidance regarding how an investment adviser's fiduciary duty and Rule 206(4)-6 under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (the “Advisers Act”) relate to an investment adviser's exercise of voting authority on behalf of clients.

See

Commission Guidance on Proxy Voting Responsibilities,

supra

note 9, at 3. Proxy voting advice businesses also provide their services to a range of clients other than investment advisers, and those clients would also benefit from improvements in the quality of the voting advice they receive.

See

Commission Interpretation on Proxy Voting Advice,

supra

note 19 at 4;

infra

Section II.A.

See, e.g., infra

notes 24 and 70.

See generally

comment letters submitted in connection with the 2018 Proxy Roundtable,

supra

note 8; comment letters submitted in connection with the

2013 Roundtable on Proxy Advisory Services, supra

note 19,

available at https://www.sec.gov/comments/4-670/4-670.shtml.

See supra

note 17.

In undertaking this rulemaking effort, we acknowledge the existence of a wider public debate about the role and impact of proxy voting advice businesses in the proxy voting system.

The focus of our rule proposal, however, is not on all aspects of proxy voting advice businesses' role in the proxy process. Rather, it is on measures that, if adopted, would address certain specific concerns about proxy voting advice businesses and would help to ensure that the recipients of their voting advice make voting determinations on the basis of materially complete and accurate information. The proposed amendments are designed to achieve these purposes without generating undue costs or delays that might adversely affect the timely provision of proxy voting advice.

For example, representatives of the registrant and retail investor communities have expressed concerns about the oversight and accountability over proxy voting advice businesses.

See, e.g.,

Letter from Darla Stuckey, President and CEO, Society for Corporate Governance (Nov. 9, 2018) (“Soc. for Corp. Gov. Letter”), at 4 (“There is no regulatory regime that governs the manner in which [proxy advisory firms] develop their policies or form the recommendations or ratings they make.”); Letter from Henry D. Eickelberg, Chief Operating Officer, Center on Executive Compensation (March 7, 2019) (“Center on Exec. Comp. Letter”), at 1 (noting a “concerning lack of accountability” for proxy advisory firms); Letter from James L. Martin, 60 Plus Association (Oct. 5, 2018); Letter from Nan Bauroth, Member, Main Street Investors Coalition Advisory Council (Jan. 25, 2019); Letter from Rasa Mokhoff (March 11, 2019); Letter from Pauline Yee (Apr. 9, 2019), at 1; Letter from Marie Reed (Apr. 16, 2019), at 1; Letter from Christopher Burnham, President, Institute for Pension Fund Integrity (Apr. 29, 2019), at 3; Letters from Bernard S. Sharfman (Oct 8, 2018, Oct. 12, 2018, and Nov. 27, 2018); Letter from Tom D. Seip (Oct. 20, 2010), at 4-6,

available at https://www.sec.gov/comments/s7-14-10/s71410.shtml;

Letter from Mark Latham, Founder,

VoterMedia.org

(Sep. 29, 2010), at 5-6,

available at https://www.sec.gov/comments/s7-14-10/s71410.shtml;

Letter from Wachtell, Lipton, Rosen & Katz (Oct. 19, 2010) (“Wachtell Letter”), at 4-6,

available at https://www.sec.gov/comments/s7-14-10/s71410.shtml

(commenting in response to the Concept Release,

supra

note 2); 38th Annual SEC Government-Business Forum on Small Business Capital Formation (Aug. 14, 2019) (at which participants developed recommendations for reform of the proxy solicitation system, including “effective oversight of proxy advisory firms”); James R. Copland, David F. Larcker & Brian Tayan,

Proxy Advisory Firms—Empirical Evidence and the Case for Reform,

Manhattan Institute 6 (May 2018),

available at https://media4.manhattan-institute.org/sites/default/files/R-JC-0518-v2.pdf.

Others, however, have expressed skepticism about these concerns.

See, e.g.,

Sagiv Edelman,

Proxy Advisory Firms: A Guide for Regulatory Reform,

62 Emory L.J. 1369, 1409 (2013) (concluding that “[t]he concerns of the critics of proxy advisory firms are overstated and distort how proxy advisory firms function and are used by their clients”); Stephen Choi, Jill Fisch & Marcel Kahan,

The Power of Proxy Advisors: Myth or Reality?,

59 Emory L.J. 869, 905-06 (2010) (estimating that the impact of proxy advisory firms' voting recommendations on actual voting outcomes is far less than commonly attributed); TIAA Letter,

supra

note 17, at 5 (asserting that the correlation between proxy advisory firms' recommendations and the voting patterns of their clients is due more to the firms' alignment with their clients' voting philosophy than the clients' overreliance on the voting advice); CII Letter,

supra

note 13, at 15 (citing a lack of compelling evidence that additional regulation of proxy advisory firms is necessary).

We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed rule amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

II. Discussion of Proposed Amendments

A. Proposed Codification of the Commission's Interpretation of “Solicitation” Under Rule 14a-1(l) and Section 14(a)

Exchange Act Section 14(a)

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.

The purpose of Section 14(a) is to prevent “deceptive or inadequate disclosure” from being made to shareholders in a proxy solicitation.

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.”

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).

J.I. Case Co.

Borak,

377 U.S. 426, 432 (1964);

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.”); H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934) (explaining the need for “adequate disclosure” and “explanation”); Communications Among Shareholders Adopting Release,

supra

note 3, at 48277.

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)); 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”).

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 to protect investors in the proxy voting process.

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.

Since then, the Commission has amended the definition as needed to respond to new market practices that have raised investor protection concerns.

See

15 U.S.C. 78n(a); 15 U.S.C. 78c(b); 15 U.S.C. 78w.

See

Exchange Act Release No. 34-378, 1935 WL 29270 (Sept. 24, 1935).

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, 1991)], 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, with one noting that a report provided by a broker-dealer to shareholders of the target company in a contested merger constituted a solicitation because it advised the shareholders that one bidder's offer was “far more attractive” than the other and therefore was a communication reasonably calculated to affect the shareholders' voting decisions.

See

Commission Interpretation on Proxy Voting Advice,

supra

note 19, at 5 n.13 (citing

Union Pac. R.R. Co.

Chicago & N.W. Ry. Co.,

226 F. Supp. 400, 408 (N.D. Ill. 1964));

see also

Broker-Dealer Release,

supra

note 32, at 341.

Commission Interpretation on Proxy Voting Advice,

supra

note 19.

See

Question and Response 1 of Commission Interpretation on Proxy Voting Advice,

supra

note 19, at 6;

see also

Concept Release,

supra

note 2 at 43009 n.244.

• 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 advisory firms 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 advisory firms 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 where shareholder approval is sought; and

• Proxy advisory firms typically provide their recommendations shortly before a shareholder meeting or authorization vote,

enhancing the likelihood that their recommendations will influence their clients' voting determinations.

See, e.g.,

Letter from Maria Ghazal, Senior Vice President and Counsel, Business Roundtable (June 3, 2019) (“Business Roundtable Letter 2”), 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-transcript-111518.pdf

(“2018 Roundtable Transcript”); 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.

Commission Interpretation on Proxy Voting Advice,

supra

note 19, at 8.

Where these or other significant factors (or a significant subset of these or other factors) is present,

the proxy advisory firms' 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.”

Furthermore, the Commission explained that such advice generally would be a solicitation even if the proxy advisory firm is providing recommendations based on the client's own tailored voting guidelines, and even if the client chooses not to follow the advice.

Such other factors may include the fact that many proxy advisory firms' recommendations are typically distributed broadly.

See

Question and Response 1 of Commission Interpretation on Proxy Voting Advice,

supra

note 19, at 9.

Id.

We are proposing to codify this Commission interpretation by amending Rule 14a-1(l). The proposed amendment would add paragraph (A) to Rule 14a-1(l)(1)(iii)

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. 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 investor protection concerns about inadequate or materially misleading disclosures that Section 14(a) and the Commission's proxy rules are intended to address.

We further 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, is 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.

The proposed 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).

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 prompted (such as in the case of a client or prospective client that has asked the adviser for its views on a particular transaction) or unprompted. For example, a mutual fund board may request that a prospective subadviser discuss its views on proxy voting, including particular types of transactions such as mergers or corporate governance. The proposed amendments are not intended to include these types of communications as solicitations for purposes of Section 14(a). Instead, the proposed amendments are 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.

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 and the Commission's rules thereunder. 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.

We recognize that the major proxy voting advice businesses may use more than one benchmark voting policy or set of guidelines in formulating their voting recommendations on 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). For example, a proxy voting advice business may offer differing voting recommendations on a matter based on the application of its benchmark policy or specialty voting policies, such as a socially responsible policy, a sustainability policy, or a Taft-Hartley labor policy. The voting recommendations formulated under the benchmark policy and each of these specialty policies would be considered to be separate communications of proxy voting advice under proposed Rule 14a-1(l)(1)(iii)(A) and for purposes of the proposed rule amendments discussed below.

We also recognize that the term “solicit” in Section 14(a) arguably might be construed more narrowly than how the Commission has long interpreted

that term. Under such a view, “solicitation” arguably might be limited to requests to obtain proxy authority or to obtain shareholder support for a preferred outcome, which might exclude certain proxy voting advice by a person retained to provide such advice to a client. We do not believe, however, such a narrow reading of Section 14(a) is required or warranted, and we adhere to the Commission's longstanding view since 1956 that any communications reasonably calculated to result in a shareholder's proxy voting decision may be regarded as a solicitation subject to Commission rules under Section 14(a). The term “solicit” did not have a single, narrow meaning when Section 14(a) was enacted.

Moreover, as discussed above, an overarching purpose of Section 14(a) is to ensure that communications to shareholders about their proxy voting decisions contain materially complete and accurate information.

It would be inconsistent with that goal if persons 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; to the contrary, in many circumstances it makes the role of this advice all the more important to those shareholders' decisions, and all the more significant in the proxy process.

Contemporaneous dictionaries ascribed several relevant meanings to the term “solicit,” including “[t]o take charge or care of, as business”; “[t]o move to action”; “[t]o approach with a request or plea, as in selling”; and “[t]o urge” or “insist upon.”

See, e.g.,

Webster's New International Dictionary (2d ed. 1934); Funk & Wagnalls New Standard Dictionary of the English Language (1932) (defining “solicit” as including to “influence to action”).

See Business Roundtable

SEC,

905 F.2d 406, 410 (D.C. Cir. 1990) (“Proxy solicitations are, after all, only

communications

with potential absentee voters. The goal of federal proxy regulation was to improve those communications and thereby to enable proxy voters to control the corporation as effectively as they might have by attending a shareholder meeting.”).

Courts have expressed similar concerns that the protections established by Section 14(a) would be hollow if the statutory provision is interpreted in an overly narrow manner.

See, e.g., SEC

Okin,

132 F.2d 784, 786 (2d Cir. 1943) (declining to view the Commission's authority as strictly limited to only requests for proxies, consents, or authorizations and stating regulation of written communications made prior to such formal requests but [that] are part of a continuous plan for a successful solicitation is needed “if the purpose of Congress is to be fully carried out.”).

Although we adhere to the Commission's longstanding view that any communication reasonably calculated to result in a proxy voting decision is a solicitation, we understand that there may be circumstances in which a person, such as a broker-dealer or an investment adviser, may receive requests for voting advice from a client that are unprompted by that person. The breadth of the Commission's definition of a solicitation could raise questions about whether such voting advice is a communication reasonably calculated to influence proxy voting by shareholders. The Commission has expressed the view in the past that such a communication should not be regarded as a solicitation subject to the proxy rules.

We are proposing to codify this view through an amendment to Rule 14a-1(l)(2), which currently lists activities and communications that do not constitute a solicitation. As proposed, the definition of a solicitation would exclude any proxy voting advice furnished by a person who furnishes such advice only in response to an unprompted request.

Commission Interpretation on Proxy Voting Advice,

supra

note 19 at 10 (“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.”);

see

Broker-Dealer Release,

supra

note 32, 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”); 1979 Adopting Release,

supra

note 36, at 68766.

See

proposed Rule 14a-1(l)(2)(v).

The proposed amendment would make clear that the federal proxy rules do not apply to this form of proxy voting advice. We continue to believe that providing voting advice to a client where the client's request for the advice has been invited and encouraged by the person's marketing, offering, and selling such advice should be distinguished from advice provided by a person only in response to an unprompted request from its client.

The information and filing requirements of the proxy rules

(including the filing and furnishing of a proxy statement with information about the registrant and proxy cards with means for casting votes) or compliance with the proposed conditions of the exemptions described below, while appropriate for a person who chooses to actively market and sell its proxy voting advice, are ill-suited for a person who receives an unprompted request from a client for its views on an upcoming matter to be presented for shareholder approval. For example, a person who does not sell voting advice as a business and who provides such advice only in response to an unprompted request from his or her client is unlikely to anticipate the need to establish the internal processes necessary to comply with our proposed new conditions to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3).

Some observers contend that a proxy voting advice business that “is contractually obligated to furnish vote recommendations based on client-selected guidelines does not provide `unsolicited' proxy voting advice, and thus is not engaged in a `solicitation' subject to the Exchange Act proxy rules.”

See

ISS Letter,

supra

note 9, at 8. For the reasons stated in this section, we do not agree with this view.

Rules 14a-3 through 14a-6 set forth the filing, delivery, information, and presentation requirements for the proxy statement and form of proxy for solicitations subject to Regulation 14A [17 CFR 240.14a-3 through 14a-6].

See supra

Section II.B.

Furthermore, the proposed amendment to Rule 14a-1(l)(2) is intended to permit the furnishing of proxy voting advice without triggering the federal proxy rules under circumstances that present significantly less risk to investor protection. It is reasonable to expect that a person who does not promote himself or herself as an expert in proxy voting advice and provides voting advice only in response to unprompted requests will be furnishing such advice only to a client with whom there is an existing business relationship.

We do not believe proxy voting advice provided under these limited circumstances presents the same investor protection or regulatory concerns as proxy voting advice businesses engaged in widespread marketing and sale of proxy voting advice to large numbers of investment advisers and other institutional investors who are often voting on behalf of other investors.

For example, a broker-dealer's role as a financial advisor for a client on investment matters may cause the client to seek voting advice from the broker-dealer as well.

See

Broker-Dealer Release,

supra

note 32, at 341.

If such advice were considered a solicitation, a person may, in the interest of caution, decline to share his or her advice or views on the upcoming matter with the client due to concerns about the need to file a proxy statement or his or her inability to comply with the exemptions from such a requirement. We believe that our proposed amendments to the definition of a solicitation in Rule 14a-1(l) are appropriately tailored to apply the protections of the federal proxy rules to proxy voting advice where they are most needed and in a manner consistent with Section 14(a).

Request for Comment

1. Should we codify the Commission interpretation on proxy voting advice and the Commission view about unprompted requests for proxy voting

advice?

Would the proposed codification (adding paragraph (A) to Rule 14a-1(l)(iii) and paragraph (v) to Rule 14a-1(l)(2)) provide market participants with better notice as to the applicability of the federal proxy rules?

See

Commission Interpretation on Proxy Voting Advice,

supra

note 19.

2. Does the proposed amendment inadvertently include certain communications made by proxy voting advice businesses or other parties, such as investment advisers, that should not fall within the definition of “solicitation”? If so, which communications, and how? Are there any revisions that we should consider that would better address these concerns or provide greater clarity?

3. For example, the proposed amendment seeks to distinguish proxy voting advice businesses from investment advisers who provide voting advice as part of a broader advisory business that already is subject to an array of investor protection regulations by referring to proxy voting advice that is marketed and sold separately from other forms of investment advice. Instead of the proposed approach, should we refer to proxy voting advice that is marketed as a “standalone service”? What would be the advantages and disadvantages of this approach? Would any further clarification of “standalone services” be required?

4. Is there a different, more appropriate way of distinguishing proxy voting advice from other forms of investment advice?

5. Should the proposed amendment be expanded to specify any other type of activity as constituting a solicitation?

6. Should the proposed amendment clarifying that proxy voting advice provided by a person only in response to an unprompted request from his or her client be limited to persons who are registered broker-dealers or investment advisers? Should there be other limits on the types of persons who should fall outside the definition of a solicitation?

B. Proposed Amendments to Rule 14a-2(b)

Under the Commission's proxy rules, any person engaging in a proxy solicitation, unless exempt, is generally subject to filing and information requirements designed to ensure that materially complete and accurate information is furnished to shareholders solicited by the person. Among other things, the person making the solicitation is required to prepare a proxy statement with the information prescribed by Schedule 14A,

together with a proxy card in a specified format, file these materials with the Commission, and furnish them to every shareholder who is solicited.

Schedule 14A requires extensive information to be included in the proxy statement, such as descriptions of matters up for shareholder vote, securities ownership information of certain beneficial owners and management, disclosures of the registrant's executive compensation and related party transactions, and, for certain matters, financial statements. Once a proxy statement is furnished to shareholders, any other written communications that constitute solicitations must be filed with the Commission as additional soliciting materials no later than the date they are first sent to shareholders.

17 CFR 240.14a-101.

17 CFR 240.14a-3(a).

17 CFR. 240.14a-6(b).

Over the years, the Commission has recognized that these filing and information requirements may, in certain circumstances, impose burdens that deter communications useful to shareholders, and in such circumstances, may not be necessary to protect investors in the proxy voting process.

Accordingly, the Commission has exempted certain kinds of solicitations from the filing and information requirements of the proxy rules, subject to various conditions, where such requirements are not necessary for investor protection. Rule 14a-9, the antifraud provision of the federal proxy rules, still applies, however, to these exempt solicitations.

See, e.g.,

Communications Among Shareholders Adopting Release,

supra

note 3, at 49278 (“[S]hareholders can be deterred from discussing management and corporate performance by the prospect of being found after the fact to have engaged in a proxy solicitation. The costs of complying with [the proxy] rules also has meant that . . . shareholders and other interested persons may effectively be cut out of the debate regarding proposals . . . .”).

17 CFR 240.14a-9.

For example, Rule 14a-2(b)(1) generally exempts solicitations by persons who do not seek the power to act as proxy for a shareholder and do not have a substantial interest in the subject matter of the communication beyond their interest as a shareholder.

This exemption was primarily intended to enable such shareholders to freely communicate with other shareholders on matters subject to a proxy vote, subject to other requirements outside of the proxy rules, such as Section 13(d) of the Exchange Act and the rules thereunder.

Another exemption, Rule 14a-2(b)(3), generally exempts proxy voting advice furnished by an advisor

to any other person with whom the advisor has a business relationship. This exemption was designed to remove an impediment to the flow of such advice to shareholders from advisors such as financial analysts, investment advisers, and broker-dealers who may be especially familiar with the affairs of registrants.

Specifically, Rule 14a-2(b)(1) provides that Sections 240.14a-3 to 240.14a-6 (other than paragraphs 14a-6(g) and 14a-6(p)), Section 240.14a-8, Section 240.14a-10, and Sections 240.14a-12 to 240.14a-15 do not apply to:

Any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another's behalf, the power to act as proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.

Provided, however,

that the exemption set forth in this paragraph shall not apply to [various interested parties, including the registrant, its officers and directors, and other persons likely to benefit from successful solicitation.]

17 CFR 240.14a-2(1).

See

Communications Among Shareholders Adopting Release,

supra

note 3, at 48280.

When the Commission adopted this rule (formerly Rule 14a-2(b)(2)), it made clear that “advisor” should be understood to mean “one who renders financial advice in the ordinary course of [its] business.”

See

1979 Adopting Release,

supra

note 36, at 68767. As the Commission stated, “The definition [of advisor] focuses on persons with financial expertise and who are likely to be particularly familiar with information about corporate affairs which may be pertinent to voting decisions.”

Id.

Rule 14a-2(b)(3) reflects this by making the exemption contingent, among other things, on the advisor rendering financial advice in the ordinary course of [its] business.

See

Rule 14a-2(b)(3)(i).

See

1979 Adopting Release,

supra

note 36, at 68766.

These exemptions, however, have remained subject to various limitations and conditions designed to ensure that investors are protected where the Commission's filing and information requirements do not apply. For example, any person who wishes to rely on the Rule 14a-2(b)(3) exemption may not receive special commissions or remuneration from anyone other than the recipient of the advice and must disclose any significant relationship or material interest bearing on the voting advice.

Furthermore, any person who

relies on Rule 14a-2(b)(1) or Rule 14a-2(b)(3) remains subject to Rule 14a-9's prohibition on false or misleading statements.

The conditions to Rule 14a-2(b)(3) are:

(i) The advisor renders financial advice in the ordinary course of his business;

(ii) The advisor discloses to the recipient of the advice any significant relationship with the registrant or any of its affiliates, or a security holder proponent of the matter on which advice is given, as well as any material interests of the advisor in such matter;

(iii) The advisor receives no special commission or remuneration for furnishing the proxy voting advice from any person other than a recipient of the advice and other persons who receive similar advice under this subsection; and

(iv) The proxy voting advice is not furnished on behalf of any person soliciting proxies or on behalf

of a participant in an election subject to the provisions of § 240.14a-12(c).

17 CFR 240.14a-2(b)(3).

Proxy voting advice businesses typically rely upon the exemptions in Rule 14a-2(b)(1) and Rule 14a-2(b)(3) to provide advice without complying with the filing and information requirements of the proxy rules.

Both exemptions, however, were adopted by the Commission 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 other institutional investors.

Their role in the process today has led some to express concerns about, among other things, the services they provide to their clients, particularly: (i) The adequacy of disclosure of any actual or potential conflicts of interest that could materially affect the objectivity of the proxy voting advice; (ii) the accuracy and material completeness of the information underlying the advice; and (iii) the inability of proxy voting advice businesses' clients to receive information and views from the registrant, potentially contrary to that presented in the advice, in a manner that is consistently timely and efficient.

See

Commission Interpretation on Proxy Voting Advice,

supra

note 19, at 7 (discussing the “two exemptions to the federal proxy rules that are often relied upon by proxy advisory firms”).

See supra

note 18 (providing client statistics for ISS and Glass Lewis).

See, e.g.,

Soc. for Corp. Gov. Letter,

supra

note 24, at 1; Business Roundtable Letter 2,

supra

note 40, at 10-13; Letter from Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce Center for Capital Markets Competitiveness (Nov. 12, 2018) (“Chamber of Commerce Letter”), at 5-8; Letter from Tony Huang, Director, Advent Capital Management, LLC (July 29, 2019) (“Advent Capital Letter”), at 6-7 (advocating in favor of Commission rulemaking to reduce the “opacity of the proxy advisory process and the potential for financial conflicts of interest”); Wachtell Letter,

supra

note 24. But commenters also submitted letters generally disputing the need for regulatory reform of proxy advisory firms.

See, e.g.,

CII Letter,

supra

note 13, at 14; OPERS Letter,

supra

note 8, at 2; NYC Comptroller Letter,

supra

note 17, at p. 3 of enclosed statement before the Senate Banking Committee on Dec. 8, 2018; Letter from Thomas DiNapoli, Comptroller, State of New York (Nov. 13, 2018), at 4.

We recognize that proxy voting advice businesses can play a valuable role in the proxy voting process. We also believe it is unnecessary for such businesses to comply with the filing and information requirements of the proxy rules to the same extent as non-exempt soliciting persons, provided other measures are in place to protect investors. However, in light of the substantial role that proxy voting advice businesses have in the voting decisions of their clients, who often vote on behalf of investors, we are proposing new conditions to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3) that would apply specifically to persons furnishing proxy voting advice that constitutes a solicitation within the scope of proposed Rule 14a-1(l)(1)(iii)(A).

See supra

Section II.A. Other persons providing voting advice that is beyond the scope of proposed Rule 14a-1(l)(1)(iii)(A), such as financial advisors providing advice to clients with whom they have a business relationship, will be able to continue relying on the Rule 14a-2(b)(1) and Rule 14a-2(b)(3) exemptions without complying with the proposed new conditions.

We believe that our proposed rule amendments would (i) improve proxy voting advice businesses' disclosures of conflicts of interests that would reasonably be expected to materially affect their voting advice, (ii) establish effective measures to reduce the likelihood of factual errors or methodological weaknesses in proxy voting advice, and (iii) ensure that those who receive proxy voting advice have an efficient and timely way to obtain and consider any response a registrant or certain other soliciting person may have to such advice. We believe that these amendments would ensure that investment advisers, who vote on behalf of investors, and others who rely on the advice of proxy voting advice businesses, receive accurate, transparent, and materially complete information when they make their voting decisions.

1. Conflicts of Interest

Proxy voting advice businesses engage in activities or have relationships that could affect the objectivity or reliability of their advice, which may need to be disclosed in order for their clients to assess the impact and materiality of any actual or potential conflicts of interest with respect to a voting recommendation.

In recent years, observers have noted the many ways in which these activities and relationships could result in conflicts of interest.

Examples include:

Concept Release,

supra

note 2, at 43011.

See

2018 Roundtable Transcript,

supra

note 40, at 202-16; 2016 GAO Report,

supra

note 9, at 32-33; 2007 GAO Report,

supra

note 9, at 9; Center on Exec. Comp. Letter,

supra

note 24, at 2-3; Soc. for Corp. Gov. Letter,

supra

note 24, at 6-7; Wachtell Letter,

supra

note 24, at 8-9; Timothy M. Doyle,

The Conflicted Role of Proxy Advisors,

American Council for Capital Formation 6 (May 22, 2018),

available at https://corpgov.law.harvard.edu/2018/05/22/the-conflicted-role-of-proxy-advisors/

(“ACCF 2018 Report”); Edelman,

supra

note 24, at 1409; Manhattan Institute, supra note 24, at 16.

• A proxy voting advice business providing voting advice to its clients on proposals to be considered at the annual meeting of a registrant while the proxy voting advice business also earns fees from that registrant for providing advice on corporate governance and compensation policies;

See, e.g.,

Glass Lewis Letter,

supra

note 16, at 9 (“For instance, Glass Lewis strongly believes that the provision of consulting services to corporate issuers, directors, dissident shareholders and/or shareholder proposal proponents, creates a problematic conflict of interest that goes against the very governance principles for which we advocate.”).

• A proxy voting advice business providing voting 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 that client;

• A proxy voting advice business providing ratings to institutional investors of registrants' corporate governance practices while at the same time consulting for the registrants that are the subject of the ratings to help increase their corporate governance scores; and

• A proxy voting advice business providing voting advice with respect to a registrant's shareholder meeting while affiliates of the business hold a significant ownership interest in the registrant, sit on the registrant's board of directors, or have relationships with the shareholder presenting the proposal in question.

These types of circumstances, where the interests of a proxy voting advice business may diverge materially from the interests of investors, create a risk that the proxy voting advice business's voting advice could be influenced by the business's own interests.

Although proxy voting advice businesses have described various measures they believe mitigate this risk,

the voting decisions

of persons who rely on these businesses would be better informed if they received information sufficient for them to understand and assess these potential risks and measures.

Investment advisers that use proxy voting advice businesses for voting advice cannot fully understand potential risks and the proxy voting advice businesses' mitigation measures if they do not have access to sufficiently detailed disclosure about the full extent and nature of any conflicts that are relevant to the voting advice they receive.

See

2016 GAO Report,

supra

note 9, at 32-33; 2007 GAO Report,

supra

note 9, at 9;

see also

U.S. Dep't of the Treasury,

A Financial System That Creates Economic Opportunities—Capital Markets

31 (Oct. 2017),

https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf

(“Public companies also had concerns about potential conflicts of interest that arise when a proxy advisory firm provides voting advice to its clients on public companies while simultaneously offering consulting services to those same companies to improve their corporate governance rankings.”).

See, e.g.,

ISS Letter,

supra

note 9, at 10 (recognizing its duty of loyalty to its clients as a registered investment adviser and summarizing its various policies and procedures designed to ensure the integrity and independence of its advice, such as: A physical and functional firewall between ISS and ISS Corporate Solutions, Inc. (“ICS”); providing clients with conflicts disclosure; the inclusion of a legend in each proxy report alerting clients to potential conflicts; and the ability of ISS clients to obtain lists of all ICS clients); Glass Lewis Letter,

supra

note 16, at 6 (discussing its policies and procedures to help monitor, manage, and address

potential conflicts and its practice of fully disclosing to clients the existence of potential conflicts by adding a disclosure note to the front cover of relevant proxy research reports). However, as discussed

infra,

concerns remain about the adequacy of these firms' conflicts of interest disclosures. We note that there is no uniform set of standards that applies to the policies and procedures utilized by the various proxy voting advice businesses to address risks posed by conflicts of interest, the absence of which can lead to inconsistent and inadequate disclosures and mitigation measures.

For example, the Commission recently discussed, in a separate release, steps that investment advisers should consider taking when deciding whether to retain or continue retaining a proxy advisory firm.

See

Question and Response 2 of Commission Interpretation on Proxy Voting Advice,

supra

note 19, at 11-12.

See

Chamber of Commerce Letter,

supra

note 70, at 3-4 (stating the Chamber's concern that conflicts of interest are pervasive at both ISS and Glass Lewis); ACCF 2018 Report,

supra

note 73, at 24 (“The proxy advisory industry is immensely complex and interwoven. Its offerings and conflicts of interest are vague and unclear and yet the largest institutional investors, pensions, and hedge funds vote based on ISS and Glass Lewis recommendations.”); Wachtell Letter,

supra

note 24, at 8; Letter from John Okray, Vice President and Assistant Counsel, OppenheimerFunds, Inc. (Sep. 24, 2009) (“Oppenheimer Letter”), at 2,

available at https://www.sec.gov/comments/s7-13-09/s71309.shtml.

However, some clients of proxy advisory firms have expressed that they are satisfied with their proxy advisory firms' efforts at managing conflicts of interest and the quality of conflicts disclosures.

See, e.g.,

2018 Roundtable Transcript,

supra

note 40, at 211-13; CII Letter,

supra

note 13, at 14; OPERS Letter,

supra

note 8, at 2; NYC Comptroller Letter,

supra

note 17, p. 3 of enclosed statement before the Senate Banking Committee on Dec. 8, 2018.

To help ensure that sufficient information about material conflicts of interest is provided consistently across proxy voting advice businesses and in a reasonably accessible manner to the clients of proxy voting advice businesses, we are proposing amendments to the exemptions from the proxy solicitation rules in Rules 14a-2(b)(1) and (b)(3) to specify that they will be available to proxy voting advice businesses only to the extent that they provide specified disclosures about their material conflicts of interest.

Rule 14a-2(b)(1) currently does not have a specified disclosure requirement for conflicts of interests. We recognize that the existing Rule 14a-2(b)(3) exemption does require advisors, including proxy voting advice businesses, to disclose to their clients the existence of significant relationships and material interests,

a condition which the Commission adopted to address concerns that certain conflicts of interest might negatively affect the value of an advisor's advice.

However, a number of observers have expressed concerns about the adequacy of these disclosures and have stated that more specific, prominent disclosure about conflicts is needed to enable clients to make a more informed assessment of proxy voting advice businesses' voting advice.

For example, some observers have asserted that the conflicts disclosures provided by proxy voting advice businesses are vague or boilerplate disclosures that do not provide sufficient information about the nature of potential conflicts.

In light of these concerns, we are proposing to require that persons who provide proxy voting advice within the scope of proposed Rule 14a-1(l)(1)(iii)(A) include in such advice (and in any electronic medium used to deliver the advice) the following disclosures, which are intended to be more illuminating than what is currently specifically required by the existing Rule 14a-2(b)(1) and (b)(3) exemptions and specifically tailored to proxy voting advice businesses and the nature of their conflicts:

See

proposed Rule 14a-2(b)(9)(i).

See

current Rule 14a-2(b)(3)(ii).

See

1979 Adopting Release,

supra

note 36, at 68766-67.

See, e.g.,

Soc. for Corp. Gov. Letter,

supra

note 24, at 6-7; Wachtell Letter,

supra

note 24, at 8-9.

See, e.g.,

ACCF 2018 Report,

supra

note 73, at 24 (noting that the proxy advisory industry's “conflicts [disclosures] are vague and unclear”); Wachtell Letter,

supra

note 24, at 8 (describing the current practice of “minimal and vague disclosure, sometimes in the form of blanket statements that simply note that conflicts may generally exist”); Oppenheimer Letter,

supra

note 79, at 2.

See

proposed Rule 14a-2(b)(9)(i).

• Any material interests, direct or indirect, of the proxy voting advice business (or its affiliates

) in the matter or parties concerning which it is providing the advice;

The term “affiliate,” as used in proposed Rule 14a-2(b)(9)(i), would have the meaning specified in Exchange Act Rule 12b-2. We recognize that proxy voting advice businesses may not necessarily have access to the information needed to determine whether an entity is an affiliate of a registrant, another soliciting person, or the shareholder proponent. Therefore, as proposed, proxy voting advice businesses would only be required to use publicly-available information to determine whether an entity is an affiliate of registrants, other soliciting persons, or shareholder proponents.

• Any material transaction or relationship between the proxy voting advice business (or its affiliates) and (i) the registrant (or any of the registrant's affiliates), (ii) another soliciting person (or its affiliates), or (iii) a shareholder proponent (or its affiliates), in connection with the matter covered by the proxy voting advice;

• Any other information regarding the interest, transaction, or relationship of the proxy voting advice business (or its affiliate) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship; and

• Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship.

As revised, the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3) would not be available unless the disclosures required by proposed Rule 14a-2(b)(9)(i) are provided. By extending these disclosure requirements to both Rule 14a-2(b)(1) and Rule 14a-2(b)(3), the proposed amendments would help ensure that investment advisers and other clients that use proxy voting advice businesses for voting advice receive the same information about potential conflicts of interests, regardless of which exemption a proxy voting advice business may rely upon for its proxy voting advice.

Proposed Rule 14a-2(b)(9)(i) would augment current disclosure requirements in Rules 14a-2(b)(1) and 14a-2(b)(3)

by specifying that enhanced disclosure about material conflicts of interest must be included in the proxy voting advice. In addition, it would utilize a principles-based requirement to elicit disclosure of any other information regarding the interest, transaction, or relationship that would be material to a reasonable investor's assessment of the objectivity of the proxy voting advice. The disclosures provided under these provisions should be sufficiently detailed so that clients of proxy voting advice businesses can understand the nature and scope of the interest, transaction, or relationship to appropriately assess the objectivity and reliability of the proxy voting advice they receive. This may include the identities of the parties or affiliates involved in the interest, transaction, or relationship triggering the proposed disclosure requirement and, when

necessary for the client to adequately assess the potential effects of the conflict of interest, the approximate dollar amount involved in the interest, transaction, or relationship. Boilerplate language that such relationships or interests may or may not exist would be insufficient for purposes of satisfying this condition to the exemptions.

The exemption in Rule 14a-2(b)(1) does not currently require conflicts of interest disclosure, while Rule 14a-2(b)(3)(ii) requires disclosure of “any significant relationship with the registrant or any of its affiliates, or a security holder proponent of the matter on which advice is given, as well as any material interests in such matter.” 17 CFR 240.14a-2(b)(3)(ii).

The proposed amendments also would require a discussion of the policies and procedures, if any, used to identify and steps taken to address such potential and actual conflicts of interest. Such disclosure should include a description of the material features of the policies and procedures that are necessary to understand and evaluate them. Examples include the types of transactions or relationships covered by the policies and procedures and the persons responsible for administering these policies and procedures. We believe that clients of proxy voting advice businesses would benefit from having this information as they assess the objectivity of the voting advice in light of disclosures about actual or potential conflicts of interest, develop a better understanding of the businesses' approaches for handling conflicts of interests, evaluate whether the conflicts were addressed effectively, and make decisions regarding whether and how to use the voting advice.

Furthermore, the proposed conflicts of interest disclosures would be required to be included in the proxy voting advice provided to clients.

For example, the disclosures would have to be part of the written report, if any, containing the proxy voting advice provided to the business's clients. To the extent that a proxy voting advice business provides its voting advice through means of an electronic voting platform or other electronic medium in addition to or in lieu of a written report, proposed Rule 14a-2(b)(9)(i) also would require that the disclosure be conveyed on such voting platform or other electronic medium to ensure that the information is prominently disclosed regardless of the means by which the advice is disseminated. Due to this proposed requirement, it would be insufficient for a proxy voting advice business only to provide such disclosures upon request from the client. We believe that imposing an affirmative duty on proxy voting advice businesses to provide the proposed disclosures of material conflicts of interest is consistent with obligations to disclose potential conflicts of interest in other contexts.

The proposed requirement also would standardize the manner in which conflicts of interest are disclosed by proxy voting advice businesses and assure that the required information receives due prominence and can be considered together with proxy voting advice at the time voting decisions are made.

Currently, Rule 14a-2(b)(3)(ii) requires that disclosure of conflicts-related information be conveyed to the recipient of the proxy voting advice, but does not specify in what manner.

For example, the information about the interests of participants in a matter presented for a vote required by Item 5 of Schedule 14A and information about related party transactions required by Item 404 of Regulation S-K [17 CFR 229.404] must be affirmatively disclosed.

See

17 CFR 229.404. In addition to the existing disclosure requirements of Rule 14a-2(b)(3)(ii), some proxy voting advice businesses are registered as investment advisers under the Advisers Act, and therefore have obligations to disclose conflicts of interest. The proposed requirements would apply to all proxy voting advice businesses and are tailored to address concerns that arise in the context of those activities. The proposed requirements would not limit, in any way, the obligations of a proxy voting advice business registered under the Advisers Act and would complement existing requirements. However, where the substance of the disclosure requirements overlap, we do not anticipate that proxy voting advice businesses registered as investment advisers would incur substantial duplicative costs because, in complying with the proposed requirements, these proxy voting advice businesses will have already needed to complete at least some of the work of identifying conflicts and developing disclosures to explain the conflicts.

We are aware that some proxy voting advice businesses have asserted that they have practices and procedures that adequately address conflict of interest concerns.

Nevertheless, we believe that disclosure of such conflicts and any practices to address them should be more consistent across proxy voting advice businesses so that all clients of proxy voting advice businesses have materially complete information upon which to make informed voting decisions.

As such, the proposed amendments would establish a baseline disclosure standard to which a proxy voting advice business must adhere in order to avail itself of the exemptions in Rule 14a-2(b)(1) and (3). We believe that by requiring proxy voting advice businesses to provide standardized disclosure regarding conflicts of interest, clients of these businesses would be in a better position to evaluate these businesses' ability to manage their conflicts of interest, both at the time the proxy voting advice business is first retained and on an ongoing basis.

See supra

note 76 and accompanying text.

Currently, proxy voting advice businesses have differing ways of disclosing their conflicts of interest. ISS discloses the details of its potential conflicts of interest, such as the identities of the parties and the amounts involved, through its ProxyExchange platform while Glass Lewis states that its disclosures are on the front cover of the report with its proxy voting advice.

See ISS FAQs Regarding Recent Guidance from the U.S. Securities and Exchange Commission Regarding Proxy Voting Responsibilities of Investment Advisers

(Oct. 17, 2019) (“ISS FAQs”),

available at https://www.issgovernance.com/file/faq/ISS_Guidance_FAQ_Document.pdf.;

Glass Lewis Letter,

supra

note 16.

Although some commenters have advocated in favor of public disclosure of a proxy advisory firm's conflicts of interest, in addition to requiring disclosure in the advisor's proxy voting advice,

see, e.g.,

Center on Exec. Comp. Letter,

supra

note 24, at 2; Wachtell Letter,

supra

note 24, at 8, we are not proposing such a requirement. The Commission's primary concern in proposing these amendments to Rule 14a-2(b) is with the recipients of proxy voting advice, including investment advisers who use that advice to make voting decisions on behalf of clients with whom they have a fiduciary relationship. Moreover, we are aware that some proxy voting advice businesses may have compelling and legitimate business reasons for limiting the dissemination of this information. For example, ISS has stated that it maintains a strict firewall between itself and its subsidiary, ICS, in order to control the risk that a conflict of interest might jeopardize the independence of its proxy voting advice business. ISS Letter,

supra

note 9, at 13. ISS indicates that “a key goal of the firewall is to keep the ISS Global Research team from learning the identity of ICS' clients, thereby insuring the objectivity and independence of ISS' research process and vote recommendation.”

Id.

ISS has stated that requiring public disclosure of relevant details about ICS' clients might compromise this information barrier and severely undermine the company's conflict mitigation program.

Id.

at 14.

Request for Comment

7. Is the text of proposed Rule 14a-2(b)(9)(i) sufficient to elicit appropriate disclosure of a proxy voting advice business's conflicts of interest to its clients? Are there other examples of conflicts of interest that the Commission should take into account in considering the text of proposed Rule 14a-2(b)(9)(i)? Is the principles-based requirement in Rule 14a-2(b)(9)(i)(C) sufficient to capture material information about conflicts of interest not otherwise included within the scope of paragraphs (9)(i)(A) and (B)? Is there additional material information that should be required?

8. Would the proposed disclosures provide clients of proxy voting advice businesses with adequate and appropriate information about the businesses' conflicts of interest when making their voting determinations?

9. To what extent do existing disclosures address the concerns discussed in this release? What additional information may be required to ensure that they provide clients with the information clients need?

10. Is there specific information, whether qualitative or quantitative, about proxy voting advice businesses' conflicts of interest that they should be required to disclose? For example, should proxy voting advice businesses be required to disclose the specific amounts that they receive from the relationships or interests covered by the

proposed conflicts of interests disclosures?

11. Would requiring specific disclosure of this sort raise competitive or other concerns for proxy voting advice businesses? For example, would the proposed disclosures be incompatible with firewalls or other mechanisms used by proxy voting advice businesses to prevent conflicts of interest from affecting the advice these businesses provide?

12. What information would be most relevant to an investment adviser or other client of a proxy voting advice business in seeking to understand how the proxy voting advice business identifies and addresses conflicts of interest?

13. Do proxy voting advice businesses consult on particular matters where their input influences the substance of the matter to be voted on (

e.g.,

providing consulting services to a hedge fund with respect to transformative transactions, such as a proxy contest where the fund is presenting a competing slate of directors)? If so, what type of disclosure would help investors to understand the proxy voting advice business's role and potential conflicts of interest regarding these situations? Is the text of proposed Rule 14a-2(b)(9)(i) sufficient to elicit disclosure of material conflicts of interest of this type?

14. Currently, Rule 14a-2(b)(3) requires disclosure to the recipient of the voting advice of “any significant relationship” with the registrants and other parties as well as “any material interests” of the advisor in the matter. By contrast, disclosure under proposed Rule 14a-2(b)(9)(i) would be required only to the extent that the information would be material to assessing the objectivity of the proxy voting advice. Is the terminology in each provision sufficiently clear with respect to the types of relationships or interests that are covered by each requirement? For example, is there sufficient clarity on how to assess whether a relationship is “material,” or is additional guidance needed? Should we consider alternative thresholds or language for the proposed conflicts of interests disclosure requirement of Rule 14a-2(b)(9)(i)? If so, what language should we consider? As an alternative, should we use the same terminology as Rule 14a-2(b)(3)? Should we look instead to Item 404 of Regulation S-K, which requires disclosure of a “direct or indirect material interest”? Is Item 5 of Schedule 14A, which requires disclosures of “any substantial interest” of the covered persons, an alternative that we should consider?

15. Should proposed Rule 14a-2(b)(9)(i) limit the matters which a proxy voting advice business must disclose to those that occurred on or after a certain date, or is a more principles-based disclosure requirement preferable?

16. Proposed Rule 14a-2(b)(9)(i) is a principles-based requirement that does not specify the manner in which conflicts of interest should be disclosed, so long as the disclosure is included in the proxy voting advice business's voting advice and, if applicable, conveyed through any electronic medium that the proxy voting advice business uses in lieu of or in addition to a written report. Should proposed Rule 14a-2(b)(9)(i) be more prescriptive regarding the presentation of conflicts of interest disclosure, or is it preferable to let the proxy voting advice business and its client determine how this information will be presented to the client?

17. Is it important that the conflicts of interest disclosure required by proposed Rule 14a-2(b)(9)(i) be included in the proxy voting advice, or would providing it separately suffice?

18. To the extent that a proxy voting advice business uses a voting platform or other electronic medium to convey its voting advice, should we require that the conflicts of interest disclosure be conveyed in the same manner?

19. Should we require the conflicts of interest disclosure that a proxy voting advice business provides to its clients be made public? If public disclosure were required, when and in what manner should the disclosures be released to the public? Would this raise competitive or other concerns for proxy voting advice businesses?

20. The proposed amendments are intended to promote consistency in the disclosures proxy voting advice businesses make about their conflicts of interest. Is the consistency of this information an important consideration?

21. Should we require proxy voting advice businesses to include in their disclosure to clients a discussion of the policies and procedures used to identify, as well as the steps taken to address, any conflicts of interest, as proposed? Do proxy voting advice businesses have sufficient incentive to include this disclosure on their own?

22. What are the anticipated costs to proxy voting advice businesses and their clients associated with requiring additional conflicts of interest disclosure, as proposed? For example, what are the costs for proxy voting advice businesses to determine whether an entity is an affiliate of a registrant, another soliciting person, or shareholder proponent? Should we impose structural requirements (

e.g.,

like the structural reforms in the global analyst research settlements)

in addition to disclosure requirements?

See

Federal Court Approves Global Research Analyst Settlement, SEC Litigation Release No. 18438 (Oct. 31, 2003).

see also

2018 Roundtable Transcript,

supra

note 40, at 226-40.

See

2016 GAO Report,

supra

note 9, at 23.

See, e.g.,

Business Roundtable Letter 1,

supra

note 94, at 11; Placenti,

supra

note 40, at 7 (discussing the results from a survey of one hundred public companies about the quality of information in proxy voting advice and its impact on

shareholder

voting);

2015 Proxy Season Survey,

Nasdaq & U.S. Chamber of Commerce 2 (as of Sept. 24, 2019),

http://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/2015-Proxy-Season-Survey-Summary.pdf

(summarizing the results of a survey of public companies' concerns about the accuracy of information in the proxy voting advice pertaining to their companies, as well as complaints about the efficacy of engaging with proxy advisory firms to impact the voting advice).

In response, proxy voting advice businesses have pointed to internal policies and procedures aimed at ensuring the integrity of their research

and the steps they have taken to enable feedback from registrants before their voting advice is issued. ISS and Glass Lewis, for example, both have systems in place to share certain information with registrants.

100

In the United States, ISS offers the constituent companies of the Standard and Poor's 500 Index the opportunity to review a draft of ISS' voting advice before it is delivered to clients.

101

Glass Lewis has a program that allows registrants who participate to receive a data-only version of its voting advice before publication to clients.

102

In addition, Glass Lewis implemented a pilot program for the 2019 proxy season, known as its Report Feedback Statement (“RFS”) service, which offers U.S. public companies and shareholder proponents the opportunity to express differences of opinion they may have with Glass Lewis' research.

103

Participants in this pilot program were able to submit feedback about the analysis of their proposals, and have comments delivered directly to Glass Lewis's investor clients along with Glass Lewis' response to the RFS.

104

For example, ISS has stated that it offers all registrants a free copy of its published analysis for their shareholder meetings upon request, which ISS believes affords the registrants the opportunity to bring any factual errors to ISS' attention.

See

ISS Letter,

supra

note 9, at 9. When it does become aware of material factual errors, ISS notes that it promptly issues a “Proxy Alert” to inform clients of any corrections and, if necessary, any resulting changes in ISS' vote recommendations.

Id.

at 11. Glass Lewis has similar policies to address factual errors and omissions.

See

Glass Lewis Letter,

supra

note 16, at 6. ISS has also noted that, as a registered investment adviser, it has a fiduciary duty of care to make a reasonable investigation to determine that it is not basing vote recommendations on materially inaccurate or incomplete information.

See

ISS Letter,

supra

note 9, at 2. We note, however, that not all proxy voting advice businesses are registered as investment advisers. It is also important to note that there is often disagreement between proxy voting advice businesses and registrants over whether information in proxy voting advice should be classified as an “error.”

See id.

at 10.

100

See

ISS Letter,

supra

note 9, at 2; Glass Lewis Letter,

supra

note 16, at 6-7;

see also

2016 GAO Report,

supra

note 9, at 28 (summarizing the issuer-review programs of ISS and Glass Lewis).

101

See

ISS Letter,

supra

note 9, at 10. ISS states that drafts of its proxy advice are always provided on a “best efforts” basis and it does not guarantee that an issuer in the S&P 500 will have an opportunity to review a draft analysis.

See ISS Draft Review Process for U.S. Issuers,

ISS,

https://www.issgovernance.com/iss-draft-review-process-u-s-issuers/

(last visited Sept. 20, 2019). Participating companies need to register with ISS in advance to receive a draft, and drafts are provided only for the reports for annual shareholder meetings, not special meetings, nor for any meeting where the agenda includes a merger or acquisition proposal, proxy fight, or any item that ISS, in its sole discretion, considers to be of a contentious nature, such as a “vote-no” campaign.

Id.

102

Glass Lewis refers to this as its Issuer Data Report (IDR) service.

See Issuer Data Report,

Glass Lewis,

https://www.glasslewis.com/issuer-data-report/

(last visited Oct. 25, 2019); 2018 Roundtable Transcript,

supra

note 40, at 230.

103

See

Katherine Rabin, CEO of Glass, Lewis, & Co.,

Glass Lewis' Report Feedback Service: Direct, Unfiltered Commentary from Issuers and Shareholder Proponents,

Harvard Law School Forum on Corporate Governance and Financial Regulation,

https://corpgov.law.harvard.edu/2019/03/31/glass-lewis-report-feedback-service-direct-unfiltered-commentary-from-issuers-and-shareholder-proponents/; Report Feedback Statement—Frequently Asked Questions,

Glass Lewis (May 2019),

available at https://www.glasslewis.com/report-feedback-statement-service/.

104

Registrants generally must pay the proxy voting advice business to obtain access to the information that they can then review. This is true as well for the RFS service. Rabin,

supra

note 103 (“In order to facilitate processing and distribution, there is a distribution fee associated with participation in the RFS service, and subscribers must also purchase a copy of the relevant Proxy Paper on which they wish to provide feedback.”).

Although some proxy voting advice businesses provide opportunities for review and feedback, these existing practices may be inadequate to address registrants' and others' concerns and ensure that those who make proxy voting decisions receive information that is accurate and complete in all material respects. For example, some proxy voting advice businesses do not provide registrants with an opportunity to review their reports containing voting advice in advance of distribution to their clients. Even those proxy voting advice businesses that provide such review opportunities do not provide all registrants with an advance copy of their reports containing their voting advice.

105

For example, it is our understanding that proxy voting advice businesses do not typically extend this opportunity to registrants with smaller market capitalization or to registrants holding special meetings. Those registrants that do have an opportunity to review the draft reports are often given a short period of time, sometimes

with little advance notice, to provide their feedback to the proxy voting advice business and are not given an opportunity to see the final report sent to clients to determine the business's response, if any, to their feedback. Finally, because a substantial percentage of proxy votes are typically cast within a few days or less of the proxy voting advice business's release of its proxy voting advice

106

and registrants often become aware of the recommendations in the proxy voting advice only after the advice has already been distributed, it can be difficult for the clients of proxy voting advice businesses to obtain registrants' factual, methodological, or other objections to the voting advice before submitting their votes.

107

Although we recognize that some proxy voting advice businesses have policies in which they would issue alerts informing their clients of errors in their voting advice or updated information released by the registrant, such policies result in the proxy voting advice businesses, not the client, determining whether the errors or information are material to a voting decision and sharing such information only after their advice has already been published.

108

As a result, some have advocated for the establishment of mandatory review periods that would allow registrants a meaningful opportunity to review and provide their feedback on proxy voting advice before the businesses provide the advice to clients and before the clients make their voting decisions.

109

105

See

2018 Roundtable Transcript,

supra

note 40, at 230.

106

See

Business Roundtable Letter 2,

supra

note 40, at 9.

107

See

2018 Roundtable Transcript,

supra

note 40, at 227-28 (“So once the report is issued, it is an uphill battle . . . filing SEC solicitation materials or doing other things to try to correct the record are very difficult.”); Placenti,

supra

note 40, at 3 (“[C]ompanies do not have the opportunity to adequately respond to the recommendation, even if it is factually incorrect.”). Registrants may file supplemental proxy materials to counter negative proxy voting recommendations and to alert investors to any factual or analytical errors they have identified in a proxy advisor's advice or disagreements with regard to methodology or analysis, but the efficacy of this is uncertain.

Id.

Although shareholders have the ability to change their vote at any time prior to the shareholder meeting, to our knowledge this seldom occurs. There may be a number of explanations for this, including the degree of inconvenience to a shareholder entailed in changing his or her vote.

108

See, e.g., ISS FAQs Regarding Recent Guidance from the U.S. Securities and Exchange Commission Regarding Proxy Voting Responsibilities of Investment Advisers

(Oct. 17, 2019) (“ISS FAQs”),

available at https://www.issgovernance.com/file/faq/ISS_Guidance_FAQ_Document.pdf.

109

See, e.g.,

Business Roundtable Letter 1,

supra

note 94, at 11; Center on Exec. Comp. Letter,

supra

note 24, at 3; Letter from Gary A. LaBranche, President and CEO, National Investor Relations Institute (Nov. 13, 2018) (“NIRI Letter”), at 4; Soc. for Corp. Gov. Letter,

supra

note 24, at 5; Wachtell Letter,

supra

note 24, at 7 (recommending that proxy advisory firms should give registrants the opportunity to review proxy voting advice before it is disseminated to clients);

see also

CII Letter, s

upra

note 13, at 15-16 (“More regulation of proxy research firms could increase costs for pension plans and other institutional investors, with no clear benefits. . . . [E]xcessive regulation of proxy research firms could impair the ability of institutional investors to promote good corporate governance and accountability at the companies in which they own stock.”)

135

See

ISS Letter,

supra

note 9, at 10 (cautioning that the imposition of additional burdens and requirements might be untenable given the firm's existing time constraints) (“In many cases, ISS has a contractual obligation to deliver proxy reports and vote recommendations to clients ten days to two weeks in advance of the meeting. . . . Given the limited time between the hard start of receiving the proxy statement and the hard stop of delivering the report to clients sufficiently in advance of the meeting, along with the concentration of a large percentage of meetings during so called `proxy season,' there simply is not time to afford all of the approximately 39,000 issuers ISS covers globally the opportunity to review draft reports.”);

see also

CII Letter,

supra

note 13, at 14-15.

c. Response to Proxy Voting Advice by Registrants and Other Soliciting Persons

In addition to the proposed review and feedback period and final notice requirements, registrants and certain soliciting persons would also have the option under the proposed amendments to request that proxy voting advice businesses include in their proxy voting advice (and on any electronic medium used to distribute the advice) a hyperlink or other analogous electronic medium directing the recipient of the advice to a written statement prepared by the registrant that sets forth its views on the advice. Although registrants are able, under the existing proxy rules, to file supplemental proxy materials to respond to negative proxy voting recommendations and to alert investors to any disagreements they have identified with a proxy voting advice business's voting advice, the efficacy of these responses may be limited, particularly given the high incidence of voting that takes place very shortly after a proxy voting advice business's voting advice is released to clients and before such supplemental proxy materials can be filed.

136

The proposed amendments would provide a more efficient and timely means of ensuring that a proxy voting advice business's clients, including investment advisers, are able to consider registrants' views at the same time they are considering the proxy voting advice and before making their voting determinations, thus improving the overall mix of information available to them at that time.

137

136

See supra

note 96 and accompanying text.

137

See

Question 2 of Commission Guidance on Proxy Voting Responsibilities,

supra

note 9, at 12 (discussing steps an investment adviser could use to evaluate its compliance). We expect that the proposed amendments to permit a registrant to review and provide its response to proxy voting advice would aid an investment adviser that has determined to take such steps. For example, we expect that the proposed requirement for inclusion of a hyperlink or other analogous electronic medium directing the recipient of the proxy voting advice to a written statement prepared by the registrant that sets forth the registrant's views on the advice could assist a proxy voting advice business's clients by alerting them to matters where, due to the differing views expressed by the registrant, the clients' assessment of any “pre-populated” votes made by the proxy voting advice business may be warranted before such votes are submitted.

Under proposed Rule 14a-2(b)(9)(iii), as a condition to the exemptions found in Rules 14a-2(b)(1) and 14a-2(b)(3), a proxy voting advice business must, upon request, include in its proxy voting advice and in any electronic medium used to deliver the advice a hyperlink (or other analogous electronic medium) that leads to the registrant's statement about the proxy advisor's voting advice. To improve the overall mix of information available to the clients of proxy voting advice businesses, such a hyperlink (or other analogous electronic medium) would need to be included upon request regardless of whether the advice is adverse to the registrant's recommendation to its shareholders.

138

Although we considered proposing a requirement that proxy voting advice businesses include a full written statement from the registrant in the proxy voting advice delivered to clients, we believe that requiring the inclusion of a hyperlink or other analogous electronic medium is a more efficient and straightforward approach that enables sufficient access to the registrant's statement without unduly restricting the proxy voting advice businesses' flexibility to design and prepare their proxy voting advice in the manner that they and their clients prefer. A hyperlink or other analogous electronic medium would likewise allow registrants flexibility to present their views in the manner they deem most appropriate or effective.

139

It is important to note, however, that the registrant's statement would constitute a “solicitation” as defined in Rule 14a-1(l) and be subject to the anti-fraud prohibitions of Rule 14a-9,

140

as well as the filing requirements of Exchange Act Rule 14a-12,

141

which would necessitate that it be filed as supplemental proxy materials no later than the date that the proxy voting advice, and thereby the registrant's statement, is first published, sent, or given to shareholders.

142

To prevent undue delays in the distribution of the proxy voting advice to clients,

registrants would be required to provide the hyperlink (or other analogous electronic medium) to the proxy voting advice business no later than the expiration of the two-day final notice period that would be required under proposed Rule 14a-2(b)(9)(ii)(B) as a condition of the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3).

138

See supra

note 112.

139

In cases where the proxy voting advice is electronically accessible, the proposed rule contemplates that the client would be able to click on a hyperlink, for example, and be directed to the registrant's statement. Alternatively, the client could type in the relevant URL (web address) using a web browser on the internet.

140

In general, the inclusion of the hyperlink (or analogous electronic medium) required under proposed Rule 14a-2(b)(9)(iii) would not, by itself, make the proxy voting advice business liable for the content of the statements made by the registrant or certain other soliciting persons about the proxy voting advice. The Commission has previously stated a person's responsibility for hyperlinked information depends on whether the person has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.

See Use of Electronic Media,

Release No. 34-42728 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)]. We believe our view is consistent with this framework as a proxy voting advice business would not likely be involved in the preparation of the hyperlinked statement and would likely be including the hyperlink (or analogous electronic medium) to comply with proposed Rule 14a-2(b)(9)(iii), and not to endorse or approve the content of the statement. We seek comment on the need for rule amendments to codify this view.

141

17 CFR 240.14a-12.

142

Activation of the hyperlink (or other analogous electronic medium) so that the response is publicly available would trigger the registrant's obligation to publicly file its statement of response pursuant to Rule 14a-6 [17 CFR 240.14a-6]. Additional soliciting materials would be filed with the Commission on EDGAR under submission type DEFA 14A or DFAN 14A.

As with the proposed review and feedback period and final notice requirements, our proposal to require inclusion of a hyperlink (or other analogous electronic medium) would provide other persons who are conducting non-exempt solicitations through the use of a proxy statement and proxy card pursuant to Regulation 14A with the same opportunity to include in the proxy voting advice and in any electronic medium used to deliver the advice a hyperlink (or other analogous electronic medium) that would lead to their response to the voting advice. We believe it is appropriate to limit the proposed requirement to extend this opportunity to parties other than the registrant to contested situations where shareholders and those acting on their behalf, including investment advisers, are actively being solicited by opposing sides through delivery of each side's own proxy statements and proxy cards and must decide with whom they wish to vote. Accordingly, proxy voting advice businesses would not be obligated to provide the same opportunity to persons conducting exempt solicitations. As with the proposed review and feedback period and final notice requirements, we are cognizant of the costs and potential logistical complications arising from the need to include a means for proxy voting advice businesses' clients to access a response to the proxy voting advice businesses' recommendations. Similarly, as discussed above, it is likely that the disclosures in these proxy statements and other mandated disclosure documents filed by the opposing sides, as well other public substantive statements that they make, would be considered by proxy voting advice businesses when formulating their voting advice. Accordingly, in our view, clients of proxy voting advice businesses have a greater need in non-exempt solicitations to be aware of disagreements over facts or opinions presented in the voting advice provided by proxy voting advice businesses. As with the registrant's statement of response, any such statements by dissident shareholders and other persons conducting non-exempt solicitations would constitute a “solicitation” as defined in Rule 14a-1(l), and would therefore be subject to the anti-fraud prohibitions of Rule 14a-9, and must be filed with the Commission as additional soliciting materials pursuant to Rule 14a-12.

The timing of the review and feedback period and final notice of voting advice under proposed Rule 14a-2(b)(9)(ii) generally would operate as follows:

143

For purposes of illustration, the following chart assumes that the registrant or other soliciting party is soliciting proxies for a meeting of shareholders. However, the description of timing would be identical if, in lieu of a shareholder meeting, the registrant or other soliciting party were soliciting proxies for a proposed action to be effected by shareholder vote, consent or authorization.

The information in this chart is intended only as an illustration and, as such, should be read together with the complete text of this release.

Action

Timing

Person conducts solicitation exempt under § 240.14a-2 or submits shareholder proposal pursuant to Exchange Act Rule 14a-8

N/A. Proposed rules do not apply.

Registrant and/or soliciting person conducts non-exempt solicitation and files definitive proxy statement for shareholder meeting

N/A. Proposed rules do not dictate when the registrant and/or soliciting person files its definitive proxy statement.

Proxy voting advice business provides the registrant and/or soliciting person with the version of the voting advice

†

that the business intends to deliver to its clients [proposed Rule 14a-2(b)(9)(ii)]

Subject to the proxy voting advice business's discretion, so long as it provides its voting advice to the registrant and/or soliciting person and complies with the required review and feedback and final notice periods in proposed Rule 14a-2(b)(9)(ii) prior to the distribution of such advice to the business's clients.

Review and feedback period:

Registrant and/or soliciting person has an opportunity to review and provide feedback, if any, on the proxy voting advice business's voting advice [proposed Rules 14a-2(b)(9)(ii)(A)

) and (A)

)]

• If definitive proxy statement is filed at least 45 calendar days before the date of the meeting, registrant and/or soliciting person has at least five business days to review and provide feedback; or

• If definitive proxy statement is filed less than 45 but at least 25 calendar days before the date of the meeting, registrant and/or soliciting person has at least three business days to review and provide feedback; or

• If definitive proxy statement is filed less than 25 calendar days before the date of the meeting, the proxy voting advice business is not required to provide its voting advice to registrant or soliciting person.

Proxy voting advice business may revise its voting advice, as applicable

N/A. Subject to the proxy voting advice business's discretion.

Final notice of voting advice:

Proxy voting advice business provides a copy of its voting advice that it will deliver to its clients to allow the registrant and/or soliciting person to assess whether or not to provide a statement with its response to the advice [proposed Rules 14a-2(b)(9)(ii)(B) and 14a-2(b)(9)(iii)]

No earlier than upon expiration of review and feedback period.

Registrant and/or soliciting person has at least two business days to provide a hyperlink (or other analogous electronic medium) with its response, if any.

Proxy voting advice business publishes its proxy voting advice to clients, which includes an active hyperlink * (or other analogous electronic medium) with the registrant's and/or soliciting person's response, if requested [proposed Rule 14a-2(b)(9)(iii)]

* Registrant and/or soliciting person is responsible for providing a web address (URL) for the response and is expected to coordinate with the proxy voting advice business as necessary to ensure that the hyperlink (or other analogous electronic medium) is functional when included in the proxy voting advice

Subject to the proxy voting advice business's discretion, but no earlier than upon expiration of two-business day period allotted for the final notice of voting advice.

Registrant holds its shareholder meeting

N/A.

†

See supra

note 121.

We designed proposed Rules 14a-2(b)(9)(ii) and (iii) so they would not overly prescribe the manner in which proxy voting advice businessess and registrants (and certain other soliciting persons) interact with each other, but instead allow the parties the flexibility to determine the most effective and cost-efficient methods of compliance. Because our approach is meant to allow the parties flexibility within this general framework, there may be a number of market solutions capable of facilitating the parties' compliance with this proposed review process. There may be existing providers and/or services readily available to support the parties' needs or, alternatively, new services and providers may emerge to satisfy demand for effective market solutions. The parties may coordinate directly with each other to manage the review process or they could elect to enter into arrangements with third-party service providers who could coordinate the process on their behalf. We recognize that there also may be various technological solutions available to the parties that would facilitate their coordination. For example, we note that one commenter suggested the use of a digital portal as a draft review mechanism, as well as for management and dissemination of the registrant's statement in response to the proxy advisor's voting advice.

144

Because there may be a number of implementation details to resolve, effective coordination between proxy voting advice businesses and registrants (and certain other soliciting persons, as applicable) would be needed. For example, to ensure that the hyperlink to the statement from the registrant (or certain other soliciting persons) is activated concurrently with the release of the proxy voting advice and that the registrant (or certain other soliciting persons) is able to timely file its statement of response as additional soliciting materials, it would be necessary for the parties to coordinate the release date of the proxy voting advice containing the active hyperlink.

145

144

See

Letter from Barbara Novick, Vice Chairman, & Ray Cameron, Managing Director, Blackrock (“Blackrock Letter”) (Nov. 16, 2018), at 3.

145

If the parties do not adequately coordinate the activation of the hyperlink with the release of the proxy voting advice, there is a risk that the hyperlink could be functional prematurely, and therefore that the registrant's or other soliciting person's statement of response would be publicly available before the registrant or other soliciting person was able to comply with Rule 14a-12(b) and timely file the statement with the Commission as additional soliciting material.

In light of the potentially significant adverse result for a proxy voting advice business if it experiences an immaterial or unintentional failure to comply with the conditions of new Rule 14a-2(b)(9),

146

the proposed amendments provide that such failure will not result in the loss of the exemptions in Rules 14a-2(b)(1) or 14a-2(b)(3) so long as (A) the proxy voting advice business made a good faith and reasonable effort

147

to comply and (B) to the extent that it is feasible to do so, the proxy voting advice business uses reasonable efforts to substantially comply with the condition as soon as practicable after it becomes aware of its noncompliance.

148

We believe this provision would serve to mitigate the risk of any unintended adverse consequences for proxy voting advice businesses as they seek to comply with the review and feedback and other provisions that we are proposing as new conditions to Rules 14a-2(b)(1) and 14a-2(b)(3). Also, failure to comply with the conditions of new Rule 14a-2(b)(9) does not create a new private right of action for registrants against proxy voting advice businesses.

146

For example, without such an exception, a proxy voting advice business that failed to give a registrant the full number of days for review of the proxy voting advice due to technical complications beyond its control, even if only a few hours shy of the requirement, would be unable to rely on the exemptions in Rule 14a-2(b)(1) and (b)(3). Without an applicable exemption on which to rely, the proxy voting advice business likely would be subject to the proxy filing requirements found in Regulation 14A and its proxy voting advice required to be publicly filed.

147

Similar to analogous provisions in other Commission rules, the determination of whether there has been a good faith and reasonable effort to comply with the proposed conditions would depend on the particular facts and circumstances. See,

e.g.,

17 CFR 230.164 (providing relief for immaterial and unintentional failures to file or delays in filing free writing prospectuses.)

148

See

paragraph (iv) of proposed Rule 14a-2(b)(9).

Request for Comment

24. How prevalent are factual errors or methodological weaknesses in proxy voting advice businesses' analyses? To what extent do those errors or weaknesses materially affect a proxy voting advice business's voting recommendations? To what extent are disputes between proxy voting advice businesses and registrants about issues that are factual in nature versus differences of opinion about methodology, assumptions, or analytical approaches?

25. As a condition to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3), should registrants and certain other soliciting persons be permitted an opportunity to review proxy voting advice and provide feedback to the proxy voting advice businesses before the businesses provide the advice to clients, as proposed? If yes, how much time should be given to review and provide feedback on proxy voting advice? Are the timeframes set forth in proposed Rule 14a-2(b)(9)(ii) appropriate? What would the impact of these proposed timeframes be on registrants, proxy voting advice businesses, and their clients? Are there alternative timeframes that would be more appropriate? Should we allow a proxy voting advice business to provide its final notice of voting advice to the registrant at any time after the registrant has provided its comments during the review and feedback period, regardless of whether the review and feedback period has expired? Are there alternative conditions to the exemptions that the Commission should consider to address the concerns regarding inaccuracies and the ability for investors to get information that is accurate and complete in all material respects?

26. Should the number of days for the review and feedback period be contingent on the date that the registrant files its definitive proxy statement? For example, should there be a longer period (

e.g.,

five business days instead of three) if the registrant files its definitive proxy statement some minimum number of days before the shareholder meeting at which proxies will be voted, as proposed? Would registrants and other soliciting persons be likely to take advantage of the additional time by filing their definitive proxy statements early enough to qualify for this treatment?

27. What impact would the proposed review and feedback period and final notice of voting advice have on the ability of proxy voting advice businesses to complete the formulation of their voting advice and deliver such advice to their clients in a timely manner? Are there additional timing considerations or logistical challenges that we should take into account?

28. Should there generally be a review and feedback period and a final notice of voting advice, as proposed? Should we allow registrants (and certain other soliciting persons) more or fewer opportunities to review the voting advice than proposed? Should a proxy voting advice business be required to provide the final notice of voting advice only if the registrant (or certain other soliciting person) provides comments to the proxy voting advice business during the review and feedback period and the proxy voting advice business's revisions are pertinent to such comments? Should the period allotted for the final notice of

voting advice be two business days, as proposed? Should it be longer or shorter?

29. Are there specific ways in which, if we allow the opportunity for registrants and certain other soliciting persons to review and provide feedback on the proxy voting advice, questions may arise about possible influencing of the proxy voting advice by the reviewing parties? How, if at all, could the independence of the advice be called into question if other parties reviewed and commented on it?

149

How could we

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