Exemptions From the Proxy Rules for Proxy Voting Advice

Federal RegisterSep 3, 2020

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-89372; File No. S7-22-19]

RIN 3235-AM50

Exemptions From the Proxy Rules for Proxy Voting Advice

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting amendments to its rules governing proxy solicitations so that investors who use proxy voting advice receive more transparent, accurate, and complete information on which to make their voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice. The amendments add conditions to the availability of certain existing exemptions from the information and filing requirements of the Federal proxy rules that are commonly used by proxy voting advice businesses. These conditions require compliance with disclosure and procedural requirements, including conflicts of interest disclosures by proxy voting advice businesses and two principles-based requirements. In addition, the amendments codify the Commission's interpretation that proxy voting advice generally constitutes a solicitation within the meaning of the Securities Exchange Act of 1934. Finally, the amendments clarify when the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the antifraud provision of the proxy rules, depending upon the particular facts and circumstances.

DATES:

Effective date:

The rules are effective November 2, 2020.

Compliance dates:

See Section II.E.

FOR FURTHER INFORMATION CONTACT:

Daniel S. Greenspan, Senior Counsel, Office of Rulemaking, at (202) 551-3430 or Valian Afshar, Special Counsel, Office of Mergers and Acquisitions, at (202) 551-3440, in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are adopting amendments to 17 CFR 240.14a-1(l) (“Rule 14a-1(l)”), 17 CFR 240.14a-2 (“Rule 14a-2”), and 17 CFR 240.14a-9 (“Rule 14a-9”) under the Securities Exchange Act of 1934 [15 U.S.C. 78a

et seq.

] (“Exchange Act”).

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 Final Amendments

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

1. Proposed Amendments

2. Comments Received

3. Final Amendments

B. Amendments to Rule 14a-2(b): Conflicts of Interest

1. Proposed Amendments

2. Comments Received

3. Final Amendments

C. Amendments to Rule 14a-2(b): Notice of Proxy Voting Advice and Response

1. Proposed Amendments

2. Comments Received

3. Final Amendments

D. Amendments to Rule 14a-9

1. Proposed Amendments

2. Comments Received

3. Final Amendments

E. Compliance Dates

III. Other Matters

IV. Economic Analysis

A. Introduction

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

2. Commenter Concerns Regarding the Rule's Economic Justification

B. Economic Baseline

1. Affected Parties and Current Market Practices

2. Current Regulatory Framework

C. Benefits and Costs

1. Overview of Benefits and Costs and Comments Received

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

3. Amendments to Rule 14a-2(b)

4. Amendments to Rule 14a-(9)

5. Effect on Smaller Entities

D. Effects on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

E. Reasonable Alternatives

1. Use a More Prescriptive Approach in the Final Amendments

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

3. Public Disclosure of Conflicts of Interest

4. Require Additional or Alternative Mandatory Disclosures in Proxy Voting Advice

5. Require Disabling or Suspension of Pre-Populated and Automatic Submission of Votes

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

7. Require a Narrower Scope of Registrant Notice

V. Paperwork Reduction Act

A. Background

B. Summary of Comment Letters to PRA Estimates

C. Burden and Cost Estimates for the Amendments

1. Impact on Affected Parties

2. Aggregate Increase in Burden

3. Increase in Annual Responses

4. Incremental Change in Compliance Burden for Collection of Information

5. Program Change and Revised Burden Estimates

VI. Final Regulatory Flexibility Analysis

A. Need for, and Objectives of, the Final Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Final Amendments

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

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. The applicable laws are set by the state in which the corporation is incorporated. For various reasons, including the widely dispersed nature of public share ownership, most shareholders do not attend these meetings in person. Rather, most shareholders of publicly traded companies exercise their right to vote on corporate matters through the use of proxies.

Congress vested in the Commission the broad authority to oversee the proxy solicitation process when it originally enacted the Securities Exchange Act of 1934 (the “Exchange Act”).

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

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 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.”).

In today's financial markets, which are characterized by significant intermediation and institutional investor participation,

proxy voting advice businesses

have come to play an important role in the proxy voting process by providing an array of voting services that can help investment advisers and institutional investor clients manage their substantive and procedural proxy voting needs.

Investment advisers and institutional investors often retain proxy voting advice businesses to assist them in making their voting determinations on behalf of their own clients and to handle other aspects of the voting process, which for certain investment advisers has become increasingly complex and demanding over time.

Investment advisers voting on behalf of clients (including retail investors) and institutional investors, by virtue of their holdings in many public companies, including as a result of indexing and other broad portfolio management strategies, must manage the logistics of voting in potentially hundreds, if not thousands, of 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 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice,

Release No. 34-87457 (Nov. 5, 2019) [84 FR 66518 (Dec. 4, 2019)] (“Proposing Release”) at 66519.

For purposes of this release, we refer to firms that advise investment advisers and institutional investors on their voting determinations, and any person who markets and sells such advice, as “proxy voting advice businesses.” Unless otherwise indicated, the term “proxy voting advice” as used in this release refers to the voting recommendations provided by proxy voting advice businesses on specific matters presented at a registrant's shareholder meeting, or for which written consents or authorizations from shareholders are sought in lieu of a meeting, and the analysis and research underlying the voting recommendations that are delivered to the proxy voting advice business's clients through any means, such as in a standalone written report or multiple reports, an integrated electronic voting platform established by the proxy voting advice businesses, or any combination thereof. The reference to “proxy voting advice,” as used in this release, is not intended to encompass (1) administrative or ministerial services, (2) data or research that is not used by a proxy voting advice business to formulate its voting recommendations, or (3) the identity of any of the proxy voting advice business's clients that receive such advice. To the extent any data or research underlies a proxy voting advice business's voting recommendations but is not delivered to its clients (such as internal work product), such data or research also would not constitute that business's proxy voting advice. Further, we recognize that, in formulating its voting recommendations, a proxy voting advice business may use data and research that was prepared by another party, such as market intelligence and database providers. For the avoidance of doubt, the fact that a third party's data and research is used by the proxy voting advice business would not, by itself, cause such third party to be a proxy voting advice business. However, if a proxy voting advice business uses a third party's data and research in formulating its voting recommendations and delivers such data and research to its clients, then the data and research would constitute part of the proxy voting advice business's proxy voting advice.

See

Proposing Release at 66520, n.17.

Id.

at 66519, n.9.

Id.

at n.8.

Proxy voting advice businesses typically provide investment advisers, institutional investors, and other clients with a variety of services that relate to the substance of voting decisions, such as: Providing research and analysis regarding the matters subject to a vote; promulgating their generally applicable benchmark voting policies (a “benchmark policy”) or specialty voting policies (a “specialty policy”), such as a socially responsible policy, a sustainability policy, or a Taft-Hartley labor policy,

that their clients can use; and making specific voting recommendations to their clients on matters subject to a shareholder vote, either based on the proxy voting advice business's benchmark or specialty policies or based on custom voting policies that are proprietary to a proxy voting advice business's clients (“custom policy”).

This advice is often an important factor in the clients' proxy voting decisions. Clients may use the proxy voting advice business's recommendations in a variety of ways, including as an alternative or supplement to their own internal resources in analyzing matters when deciding how to vote.

For example, the various benchmark and specialty policies of one proxy voting advice business, Institutional Shareholder Services (ISS), are set forth on the following web page:

https://www.issgovernance.com/policy-gateway/voting-policies/.

The various benchmark and specialty policies of another proxy voting advice business, Egan-Jones, are set forth on the following web page:

https://www.ejproxy.com/methodologies/.

See

Proposing Release at 66519. As discussed

infra

Section II.C.3.c.i., we are excluding from the requirements of new Rule 14a-2(b)(9)(ii) proxy voting advice to the extent that such advice is based on custom policies. Custom policies would not include the proxy voting advice businesses' benchmark or specialty policies, even if those benchmark or specialty policies were to be adopted by proxy voting advice businesses' clients.

See infra

note 394 for a discussion of how a proxy voting advice business may satisfy the requirements of new Rule 14a-2(b)(9)(ii) in situations in which a client's custom policy is identical to the benchmark or specialty policies.

Id.

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.

Id.

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.

Because proxies have become the predominant means by which shareholders of publicly traded companies exercise their right to vote on corporate matters,

and institutional investors hold a significant and increasing number of shares, proxy voting advice businesses have become uniquely situated in today's market to influence,

and in many cases directly execute, these investors' voting decisions.

Id.

at 66520, n.18.

Id.

at 66518, n.2.

See, e.g.,

letter from Council of Inst. Investors (Nov. 14, 2019) (“CII I”) (noting that proxy voting advice businesses' “recommendations and related analysis” may be “market-moving”).

See also

Release No. 34-39538 (Jan. 12, 1998) [63 FR 2854 (Jan. 16, 1998)] (stating the Commission's views on when a significant shareholder's proxy soliciting activities and communications could be viewed as having the purpose or effect of changing or influencing control of the company and thereby triggering the obligation to file a Schedule 13D). Under Section 13(d) and Section 13(g), a “group” is formed when two or more persons act together for the purpose of acquiring, holding, voting or disposing of the securities. Congress created the “group” concept to prevent persons who seek to pool their voting or other interests in the securities of an issuer from evading the Section 13(d) or 13(g) obligations because no one person owns more than five percent of the securities. Use of a proxy voting advice business by investors as a vehicle for the purpose of coordinating their voting decisions regarding an issuer's securities without complying with the filing obligations of Section 13(d) or 13(g) would raise compliance concerns under the beneficial ownership reporting requirements.

Other statutes that often play an important and complementary role in furthering all aspects of the Commission's mission in the context of proxy voting and proxy solicitation include Sections 5, 11, and 12 of the Securities Act of 1933 (the “Securities Act”), in particular in circumstances where the vote being solicited is in connection with a significant transaction, such as a merger, in which new securities may be issued to the shareholders who are voting on the transaction. In such a situation, both the registration and prospectus requirements of Securities Act Section 5 and the proxy solicitation requirements of Exchange Act Section 14(a) apply, with public companies often filing a joint proxy statement/prospectus to fulfill both statutory obligations.

This framework—complementary and overlapping statutes and rules that are based on principles, facts and circumstances, and each participant's actions as well as status—applies similarly in other key areas of the Commission's mandate, including the offer and sale of securities in both the public and private markets, securities trading, and the provision of investment advice to retail and institutional investors. Moreover, this framework is consistent with Congressional intent as reflected in the enactment of the Securities Act, the Exchange Act, the Advisers Act, and various other key statutes, including Section 14(a), and has proven to be an effective and efficient means to regulate an important, multi-faceted and ever-evolving aspect of commerce. Accordingly, given the importance of a properly functioning proxy system to investors and the capital markets, even if other provisions of the federal securities laws may apply to certain of their activities, it is appropriate for voting advice furnished by proxy voting advice businesses to be subject to the rules under Section 14(a), which are designed specifically to enhance the transparency and integrity of the proxy voting process, with the ultimate aim of facilitating informed voting decisions.

See

Proposing Release at 66520.

II. Discussion of Final Amendments

A. 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).

Borak,

377 U.S. at 432; s

S. Rep. No. 1455, 73d Cong., 2d Sess., 74 (1934) (“In order that the

stockholder may have adequate knowledge as to the manner in which his interests are being served, it is essential that he be enlightened not only as to the financial condition of the corporation, but also as to the major questions of policy, which are decided at stockholders' meetings.”); Communications Among Shareholders Adopting Release at 48277.

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)).

The Exchange Act does not define what constitutes a “solicitation” for purposes of Section 14(a) and the Commission's proxy rules. Accordingly, the Commission has exercised its rulemaking authority over the years to define what communications are solicitations and to prescribe rules and regulations when necessary and appropriate in the public interest and to protect 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 and changing market practices that have raised the concerns underlying Section 14(a).

See

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

See Order Execution Obligations,

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

The Commission revised the definition in 1938 to include any request for a proxy, regardless of whether the request is accompanied by or included in a written form of proxy.

See

Release No. 34-1823 (Aug. 11, 1938) [3 FR 1991 (Aug. 13, 1938)], at 1992. It subsequently revised the definition in 1942 to include “any request to revoke or not execute a proxy.”

See

Release No. 34-3347 (Dec. 18, 1942) [7 FR 10653 (Dec. 22, 1942)], at 10656. Courts have also taken a broad view of solicitation.

See infra

notes 141-146 and accompanying text.

In particular, the Commission expanded the definition of a solicitation in 1956 to include not only requests for proxies, but also any “communication to security holders under circumstances reasonably calculated to result in the procurement, execution, or revocation of a proxy.”

This expanded definition was prompted by recognition that some market participants were distributing written communications designed to affect shareholders' voting decisions well in advance of any formal request for a proxy that would have triggered the filing and information requirements of the federal proxy rules.

17 CFR 240.14a-1(l)(1)(iii);

see Adoption of Amendments to Proxy Rules,

Release No. 34-5276 (Jan. 17, 1956) [21 FR 577 (Jan. 26, 1956)], at 577;

see also Broker-Dealer Participation in Proxy Solicitations,

Release No. 34-7208 (Jan. 7, 1964) [29 FR 341 (Jan. 15, 1964)] (“Broker-Dealer Release”), at 341 (“Section 14 and the proxy rules apply to any person—not just management, or the opposition. This coverage is necessary in order to assure that all materials specifically directed to stockholders and which are related to, and influence their voting will meet the standards of the rules.”).

See generally

Communications Among Shareholders Adopting Release.

Since 1956, the Commission has recognized that its definition of a solicitation was broad and applicable regardless of whether persons communicating with shareholders were seeking proxy authority for themselves.

In light of the breadth of this definition, the Commission adopted an exemption from the information and filing requirements of the Federal proxy rules for communications by persons not seeking proxy authority, but continued to include such communications within the definition of a “solicitation.”

The Commission also adopted another exemption from the information and filing requirements for proxy voting advice given by advisors to their clients under certain circumstances, but likewise continued to include such advice within the definition of “solicitation,” subject to an exception discussed below.

By adopting these tailored exemptions, the Commission removed certain filing and other requirements that were considered unnecessary for such solicitations in order to facilitate shareholder access to more sources of information when voting, though the antifraud provisions of the proxy rules continued to apply.

Id.

at 48276 (adopting Exchange Act Rule 14a-2(b)(1)).

See id.

See Shareholder Communications, Shareholder Participation in Corporate Electoral Process and Corporate Governance Generally,

Release No. 34-16356 (Nov. 21, 1979) [44 FR 68764 (Nov. 29, 1979)] (“1979 Adopting Release”), at 68766.

The Commission has previously observed that the definition of a solicitation for purposes of Section 14(a) may result in proxy voting advice businesses being subject to the Federal proxy rules because they provide recommendations that are reasonably calculated to result in the procurement, withholding, or revocation of a proxy and thus, as a general matter, the furnishing of proxy voting advice constitutes a solicitation.

In 2019, the Commission issued an interpretative release regarding the application of the Federal proxy rules to proxy voting advice.

As the Commission explained in that release, the determination of whether a communication is a solicitation for purposes of Section 14(a) depends upon both the specific nature, content, and timing of the communication and the circumstances under which the communication is transmitted.

The Commission noted several factors that indicate proxy voting advice businesses generally engage in solicitations when they provide proxy voting advice to their clients, including:

See

Concept Release at 43009.

See also

Proposing Release at 66522; Broker-Dealer Release at 341.

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”).

See

Commission Interpretation on Proxy Voting Advice at 47417.

See also

Proposing Release at 66522; Concept Release 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 voting advice businesses market their expertise in researching and analyzing matters that are subject to a proxy vote for the purpose of assisting their clients in making voting decisions;

• Many clients of proxy voting advice businesses retain and pay a fee to these firms to provide detailed analyses of various issues, including advice regarding how the clients should vote through their proxies on the proposals to be considered at the registrant's upcoming meeting or on matters for which shareholder approval is sought; and

• Proxy voting advice businesses typically provide their recommendations shortly before a shareholder meeting or authorization vote,

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) 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;

Frank Placenti,

Are Proxy Advisors Really A Problem?,

American Council for Capital Formation 3 (Oct. 2018),

available at http://accfcorpgov.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport_FINAL.pdf.

Commission Interpretation on Proxy Voting Advice at 47418.

See also

Proposing Release at 66522.

The Commission observed that where these or other significant factors (or a significant subset of these or other factors) are present,

the proxy voting advice businesses' voting advice

generally would constitute a solicitation subject to the Commission's proxy rules because such advice would be “a communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.”

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

In addition, the fact that proxy voting advice businesses may provide additional services, such as consulting services to investment advisers and issuers and general market commentary, does not diminish their role in the proxy solicitation process.

Such other factors may include the fact that many proxy voting advice businesses' recommendations are typically distributed broadly.

See

Commission Interpretation on Proxy Voting Advice at 47418.

See also

Proposing Release at 66522.

See

Commission Interpretation on Proxy Voting Advice at 47418.

See also

Proposing Release at 66522.

1. Proposed Amendments

In the Proposing Release, the Commission proposed to amend 17 CFR 240.14a-1(l)(1)(iii) (“Rule 14a-1(l)(1)(iii)”) to add paragraph (A) to make clear that the terms “solicit” and “solicitation” include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee.

The proposed amendment would codify the long-held Commission view that the furnishing of proxy voting advice generally constitutes a solicitation governed by the federal proxy rules.

Proposing Release at 66522, 66557.

In connection with the proposed amendment to Rule 14a-1(l)(1)(iii), the Commission recognized that the major proxy voting advice businesses may use more than one voting policy or set of guidelines in formulating their voting recommendations on a particular matter to be voted at a shareholder meeting (or for which written consents or authorizations are sought in lieu of a meeting). For example, a proxy voting advice business may offer differing voting recommendations on a matter based on the application of its benchmark policy or various specialty policies. Under the proposal, the voting recommendations formulated under the benchmark policy and each of the specialty policies would be considered to be a separate communication of proxy voting advice under proposed Rule 14a-1(l)(1)(iii)(A). In addition to voting recommendations formulated pursuant to a proxy voting advice business's benchmark and specialty policies, the Commission also proposed to include voting recommendations formulated pursuant to a proxy voting advice business's client's own custom policies within the scope of the term “solicitation,” consistent with its prior interpretation.

Proposing Release at 66522.

Lastly, the Commission proposed to amend Rule 14a-1(l)(2), which currently lists activities and communications that do not constitute a solicitation, to add paragraph (v) to make clear that the terms “solicit” and “solicitation” exclude any proxy voting advice furnished by a person who furnishes such advice only in response to an unprompted request.

Doing so would codify the Commission's historical view that such a communication should not be regarded as a solicitation subject to the proxy rules.

Id.

at 66523, 66557.

Commission Interpretation on Proxy Voting Advice at 47419 (“We view these services provided by proxy advisory firms as distinct from advice prompted by unsolicited inquiries from clients to their financial advisors or brokers on how they should vote their proxies, which remains outside the definition of solicitation.”); 1979 Adopting Release at 68766.

See also

Broker-Dealer Release at 341 (setting forth the opinion of the SEC's General Counsel that a broker is not engaging in a “solicitation” if it is merely responding to his customer's request for advice and “not actively initiating the communication”).

2. Comments Received

Commenters expressed a mix of views on the Commission's proposed amendments to the definitions of “solicit” and “solicitation” in 17 CFR 240.14a-1(l)(1) (“Rule 14a-1(l)(1)”). A number of commenters supported codifying the Commission's interpretation of those definitions as proposed.

Some of these commenters described the proposed amendments as consistent with the Commission's existing interpretation of the term “solicitation”

and noted that the advice provided by proxy voting advice businesses is the kind of information that Congress intended Section 14(a) to address.

Two commenters agreed with the Commission's position that the definition of “solicitation” should not be limited to a request to obtain proxy authority or to obtain shareholder support for a preferred outcome.

Those two commenters also agreed with the Commission's view that each voting recommendation formulated pursuant to a benchmark policy or a specialty policy should be considered a separate “solicitation.”

Other commenters added that the analysis of what constitutes a “solicitation” should not turn on whether the proxy voting advice business's voting recommendations are based on an investor's custom policy or the proxy voting advice business's benchmark policy.

Finally, a few commenters that supported the proposed amendments recommended that the Commission include in the definition of “solicitation” any reports and ratings by environmental, social, and governance ratings firms or environmental and sustainability rating firms.

See

letters from BIO; BRT; CCMC; CEC; CGC; Michael McCormick, Executive Vice President, General Counsel Secretary, Ecolab Inc. (Feb. 3, 2020) (“Ecolab”); Exxon Mobil; Dennis E. Nixon, President, International Bancshares Corporation (Jan. 23, 2020) (“IBC”); NAM; Nareit; Nasdaq; David Dixon, President, and David L. Dragics, Advocacy Ambassador, NIRI Capital Area Chapter (Feb. 6, 2020) (“NIRI-Capital”); Phil Gramm (Feb. 3, 2020) (“P. Gramm”); Niels Holch, Executive Director, Shareholder Communications Coalition (Feb. 3, 2020) (“SCC I”); SCG; Stakeholders Empowerment Service (Jan. 31, 2020) (“SES”).

See

letters from BRT; CCMC; NAM; Nasdaq; NIRI-Capital.

See

letters from BRT; CCMC; Exxon Mobil; NAM; Nareit; SCC I.

See

letters from NAM; SCG.

See

letters from NAM; SCG.

See

letters from Exxon Mobil; NAM; SCG.

See

letters from Exxon Mobil; Garmin; NAM.

Other commenters opposed codifying the Commission's interpretation of “solicit” and “solicitation.”

Some

commenters asserted that the Commission does not have the authority to regulate proxy voting advice businesses under Section 14(a)

or other provisions of the Exchange Act.

Some described the proposal as inconsistent with the Commission's historical treatment of Section 14(a).

Some commenters added that proxy voting advice differs from proxy solicitation and should not be treated as such under the proxy rules.

Specifically, these commenters asserted that proxy solicitation differs from proxy advice in that proxy solicitors play an advocacy role on behalf of an interested party, whereas proxy voting advice businesses are independent third parties, hired by shareholders to provide objective advice that the recipients are not required to follow.

One commenter also asserted that the proposal incorrectly equates proxy voting advice with the right to vote on another's behalf and in a manner that would benefit a particular party.

Two other commenters, which were identified as proxy voting advice businesses in the Proposing Release,

asserted that even if the Commission amends the definition of “solicitation” as proposed, their activities will not constitute “solicitations” under the revised definition because they vote on behalf of their clients rather than providing them with research reports and voting recommendations.

100

See

letters from Anat Admati, George G.C. Parker Professor of Finance and Economics, Stanford Graduate School of Business, et al. (Jan. 15, 2020) (“62 Professors”); Brandon Rees, Deputy Director, Corporations at Capital Markets, AFL-CIO (Feb. 3, 2020) (“AFL-CIO II”); Robert Arnold and Matthew Aquiline, Trustees, Bricklayers & Trowel Trades International Pension Fund (Jan. 31, 2020) (“Bricklayers”); Marcie Frost, Chief Executive Officer, CalPERS (Feb. 3, 2020) (“CalPERS”); Aeisha Mastagni, Portfolio Manager, California State Teachers' Retirement System (Feb. 3, 2020) (“CalSTRS”); Marcia Moffat, Board Chair, Canadian Coalition for Good Governance (Feb. 3, 2020) (“Canadian Governance Coalition”); James Allen, Head, and Matt Orsagh, Senior Director, Capital Markets Policy, CFA Institute (Feb. 3, 2020) (“CFA Institute I”); Kenneth A. Bertsch, Executive Director, and Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors (Jan. 30, 2020) (“CII IV”); Rob Collins, Council for Investor Rights and Corporate Accountability (Feb. 3, 2020) (“CIRCA”); Ron Baker, Executive Director, Colorado Public Employees' Retirement Association (Feb. 3, 2020) (“Colorado Retirement”); Duane Roberts, Director of Equities, Dana Investment Advisors (Dec. 5, 2019) (“Dana”); Richard B. Zabel, General Counsel and Chief Legal Officer, Elliott Management Corporation (Jan. 31, 2020) (“Elliott I”); Hans-Christoph Hirt, Executive Director and Head, Hermes Equity Ownership Services Limited (Feb. 3, 2020) (“Hermes”); ISS, Josh Zinner, CEO, Interfait Center on Corporate Responsibility (Feb. 3, 2020) (“Interfaith Center II”); Kevin Cameron, Executive Chair, Glass Lewis (Feb. 3, 2020) (“Glass Lewis II”); Jonathan Grabel, Chief Investment Officer, LACERA (Feb. 3, 2020) (“LA Retirement”),

Sarah Wilson, CEO, Minerva Analytics (Jan. 2, 2020) (“Minerva I”); Thomas P. DiNapoli, New York State Comptroller (Feb. 3, 2020) (“New York Comptroller II”); Karen Carraher, Executive Director, and Patti Brammer, Corporate Governance Officer, Ohio Public Employees Retirement System (Feb. 3, 2020) (“Ohio Public Retirement”); PIRC, on behalf of Local Authority Pension Fund Form (LAPFF) (Feb. 3, 2020) (“PIRC”); Fiona Reynolds, Chief Executive Officer, Principles for Responsible Investment (Feb. 3, 2020) (“PRI II”); Konstantinos Sergakis, Professor of Capital Markets Law and Corporate Governance, University of Glasgow (Dec. 26, 2019) (“Prof. Sergakis”); Craig M. Rosenberg, President, ProxyVote Plus, LLC (Feb. 3, 2020) (“ProxyVote II”); Hank Kim, Executive Director & Counsel, National Conference of Public Employee Retirement Systems (Feb. 3, 2020) (“Public Retirement Systems”); Maureen O'Brien, Vice President, Corporate Governance Director, Segal Margo Advisors (Feb. 3, 2020) (“Segal Marco II”); Andrew E. Oster, CFP, AIF, President & CCO, Triton Wealth Advisors LLC (Feb. 22, 2020) (“Triton”); Nell Minow, Vice Chair, ValueEdge (Jan. 31, 2020) (“ValueEdge I”); Theresa Whitmarsh, Executive Director, Washington State Investment Board (Jan. 22, 2020) (“Washington State Investment”).

See

letters from AFL-CIO II; CII IV; Elliott I; Glass Lewis II; ISS; Richard A. Kirby and Beth-ann Roth, RK Invest Law, PBC (Feb. 3, 2020) (“RK Invest Law”); ProxyVote II.

See

letter from ISS.

See

letters from CalPERS; CII IV; Elliott I; Glass Lewis II; ISS; ProxyVote II.

See

letters from Bricklayers; CalPERS; CII IV; CIRCA; Elliott I; Glass Lewis II; ISS; New York Comptroller II; Segal Marco II.

See

letters from Bricklayers; CII IV; CIRCA; Glass Lewis II; ISS; New York Comptroller II; Segal Marco II.

See

letter from CalPERS.

See

Proposing Release at 66542, n.190.

100

See

letters from ProxyVote II; Segal Marco II. Similarly, another commenter noted that it executes votes directly on behalf of—but does not provide voting recommendations to—its clients.

See

letter from Mary Beth Gallagher, Executive Director, Investor Advocates for Social Justice (Feb. 3, 2020) (“IASJ”).

See also

letters from Sean P. Bannon, Chief Financial Officer, Felician Sisters of North America (Feb. 3, 2020) (“Felician Sisters II”); Toni Palamar, Province Business Administrator, Sisters of the Good Shepherd (Feb. 3, 2020) (“Good Shepherd”); Interfaith Center II; Patricia A. Daly, Corporate Responsibility Representative, Sisters of St. Dominic of Caldwell (Feb. 3, 2020) (“St. Dominic of Caldwell”).

In addition, some commenters stated that the proposed codification of “solicitation” would increase proxy voting advice businesses' costs

101

or interfere with their ability to provide services to their clients.

102

Specifically, these commenters asserted that the proposed amendments would increase litigation risks facing proxy voting advice businesses

103

and interfere with the relationship between investors and proxy voting advice businesses in a way that would increase costs and complexity and bias voting recommendations in favor of corporate management.

104

Two commenters further expressed concern that treating proxy advice as a solicitation could have a chilling effect on shareholder communication.

105

101

See

letters from 62 Professors; CalSTRS; Elliott I; Interfaith Center II; New York Comptroller II; Public Retirement Systems; Washington State Investment.

102

See

letters from CalSTRS; CIRCA; Elliott I; Interfaith Center II; New York Comptroller II; Ohio Public Retirement; Prof. Sergakis; Public Retirement Systems.

103

See

letters from CIRCA; Elliott I; New York Comptroller II; Ohio Public Retirement; PRI II.

104

See

letters from New York Comptroller II; PRI II.

105

See

letters from CalPERS; Washington State Investment.

Some commenters asserted that the Commission has not provided reliable evidence that existing communications between proxy voting advice businesses and their institutional investor clients present a significant risk to investor protection to justify the proposed amendment.

106

Several commenters expressed concern that the Commission disregarded the findings and views of its 2018 Roundtable on the Proxy Process, the Office of Investor Advocate, and the Investor Advisory Committee and called into question the legitimacy of other comment letters.

107

One commenter requested that the Commission clarify the benefits of treating proxy advice as a solicitation.

108

Two commenters also expressed concern that the proposal would overlap with regulations that proxy voting advice businesses are already subject to, including as “investment advisers” under the Advisers Act and as fiduciaries under the Employee Retirement Income Security Act of 1974.

109

106

See

letters from CII IV; Elliott I.

107

See

letters from CII IV; Elliott I; Glass Lewis II; ISS.

108

See

letter from CalPERS.

109

See

letters from ISS; ProxyVote II.

Finally, some commenters that generally opposed the proposal recommended that, if the Commission ultimately decides to amend Rule 14a-1(l), it should make the following revisions to narrow the scope of the proposals:

110

See

letters from CII IV; ISS; New York Comptroller II; PRI II; ProxyVote II; Segal Marco II.

• Clarify whether “proxy voting advice” under Rule 14a-1(l)(1)(iii)(A) would include data and research that may inform a proxy analysis or be described in a proxy research report but that is marketed separately to investors;

111

See

letter from ISS. The commenter further opined that the inclusion of such data and research in the scope of “proxy voting advice” would be “highly inappropriate.”

Id.

• Exclude advice based on investors' custom policies from the definition of “solicitation”;

112

See

letters from ISS; New York Comptroller II; Matthew DiGuiseppe, Head of Asset Stewardship, Americas, and Benjamin Colton, Head of Asset Stewardship, Asia Pacific, State Street Global Advisors (Feb. 3, 2020) (“State Street”).

• Modify the proposal to recognize the difference between proxy voting advice businesses and proxy voting agent businesses, the latter of which “vote solely on behalf of clients, in accordance with such clients' preset voting guidelines, based upon third-party research” and should not be subject to regulation as a proxy voting advice business;

113

and

113

See

letter from Segal Marco II.

• Clarify that the reference to “other forms of investment advice” in Proposed Rule 14a-1(l)(1)(iii)(A) is not intended to exclude only advice from an “investment adviser” and thereby sweep into the scope of the term “solicitation” communications made in the normal course of business by other professionals (

e.g.,

management-consulting firms, lawyers, accountants, broker-dealers, etc.).

114

See

letter from Hermes.

With respect to the proposed amendment to Rule 14a-1(l)(2), some commenters supported the proposal to exclude from the definition of a “solicitation” any proxy voting advice furnished by a person only in response to an unprompted request.

115

Another

commenter, however, opposed the proposal, asserting that it would be unworkable because investment advisers and broker-dealers may be hesitant to announce a willingness to provide voting advice out of concern that the Commission would determine they had “invited and encouraged” their clients to ask for advice.

116

This commenter added that the proposed amendment would be counterproductive to investor protection goals because the Commission would be regulating experts with proxy advice-related skills and resources (

i.e.,

proxy voting advice businesses), but would not regulate parties with no relevant expertise who engage in the same activities (

i.e.,

any person that furnishes proxy voting advice in response to an unprompted request).

117

Finally, one commenter recommended that the Commission narrow the proposed exclusion to cover only proxy voting advice provided pursuant to an unprompted request “and not for compensation.”

118

115

See

letters from Andrew Cave, Head of Governance and Sustainability, Baillie Gifford & Co

(Feb. 3, 2020) (“Baillie Gifford”); BRT; CCMC; Exxon Mobil; IBC.

116

See

letter from ISS.

117

Id.

118

See

letter from Exxon Mobil.

3. Final Amendments

We are adopting the amendments to Rule 14a-1(l)(1)(iii) and 17 CFR 240.14a-1(l)(2) (“Rule 14a-1(l)(2)”) as proposed, with some minor changes to the proposed amendment to Rule 14a-1(l)(1)(iii).

With respect to Rule 14a-1(l)(1)(iii), consistent with the Proposing Release, we are adding paragraph (A)

119

to make clear that the terms “solicit” and “solicitation” include any proxy voting advice

120

that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee.

119

The amendment is intended to make clear that proxy voting advice provided under the specified circumstances constitutes a solicitation under current Rule 14a-1(l)(1)(iii). It is not intended to amend, limit, or otherwise affect the scope of Rule 14a-1(l)(1)(iii).

120

As noted above, one commenter requested clarification as to whether the term “proxy voting advice” would include data and research that may inform a proxy analysis or be described in a proxy research report but that is marketed separately to investors.

See supra

note 111 and accompanying text. We have clarified the scope of that term.

Compare supra

note 7,

with

Proposing Release at 66519 & n.11.

As noted above, the determination of whether a communication is a solicitation ultimately depends on the specific nature, content, and timing of the communication and the circumstances under which the communication is transmitted.

121

A number of factors illuminate that determination, and, as set forth above, application of those factors indicate that the advice that proxy voting advice businesses provide to their clients generally constitutes a “solicitation.”

122

This amendment, therefore, codifies the Commission's interpretation that proxy voting advice generally constitutes a “solicitation” under Rule 14a-1(l).

123

As we noted in the Proposing Release, we believe the furnishing of proxy voting advice by a person who has decided to offer such advice, separately from other forms of investment advice, to shareholders for a fee, with the expectation that its advice will be part of the shareholders' voting decision-making process, is conducting the type of activity that raises the concerns about inadequate or materially misleading disclosures that Section 14(a) and the Commission's proxy rules are intended to address.

124

We also believe that the regulatory framework of Section 14(a) and the Commission's proxy rules, with their focus on the information received by shareholders as part of the voting process, are well-suited to enhancing the quality and availability of the information that clients of proxy voting advice businesses are likely to consider as part of their voting determinations.

125

121

See supra

note 75 and accompanying text.

122

See supra

notes 75-79 and accompanying text;

See also

letters from commenters generally supporting the proposals,

e.g.,

ACCF (“Investors need to be fully informed of the biases and conflicts inherent in [the] powerful vote recommendations [of proxy voting advice businesses].”); BRT (“. . . conflicts of interest that may arise for proxy advisors should be disclosed in order for their clients to assess for themselves the effect and materiality of any actual or potential conflicts of interest with respect to a voting recommendation . . . We agree with the Commission's assessment that institutional investors and investment advisers who rely on proxy advisors for voting guidance cannot identify potential risks 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.”); Exxon Mobil Corp., (Feb. 3, 2020) (“ExxonMobil”); Tao Li, Ph.D., Assistant Professor of Finance, University of Florida (Jan. 30, 2020) (“Prof. Li”) (“. . . it remains imperative that market participants are aware of any potential conflicts of interest within the industry and whether those conflicts are impeding the role of proxy advisors as independent providers of information and recommendations.”); NAM; Nareit; Nasdaq; SCG; CCMC.

194

See, e.g.,

letters from ACCF (citing its May 2018 research paper: “The Conflicted Role of Proxy Advisors”); BIO; BRT; CEC; CCMC; ExxonMobil; Jason Ward, Managing Partner, Amrop Industrial Search LLC (Feb. 3, 2020) (“J. Ward”); NAM; Nareit; Nasdaq; SCG. To substantiate their claims that conflicts of interest are pervasive in proxy voting advice, several commenters pointed to the results of various opinion surveys of selected companies and individuals reflecting significant concerns about conflicts of interest.

See, e.g.,

letters from CCMC; Ashley Baker, Director of Public Policy, The Committee for Justice, (Feb. 3, 2020) (“Committee for Justice”); J. Ward; Nareit; Nasdaq; P. Mahoney and J.W. Verret; SCG; Seven Corners Capital Management, LLC (Apr. 8, 2020) (“Seven Corners”).

Some commenters opposed the proposed amendments,

195

asserting that additional conflict disclosure requirements were not justified

196

and, therefore, would impose unnecessary additional costs and burdens on proxy voting advice businesses and their clients.

197

These commenters challenged, among other things, the claims that proxy voting advice businesses' conflicts of interest disclosures were materially deficient,

198

and contended that the businesses' existing policies and procedures (such as their disclosure practices and maintenance of internal firewalls to guard against conflicts) adequately addressed the risk of conflicts.

199

In support of this view, commenters noted that the predominant opinion among the

businesses' own clients was that the measures taken to mitigate conflicts of interest were satisfactory.

200

Moreover, commenters argued that adding new disclosure requirements to the proxy rules was unnecessary in light of existing provisions in the Advisers Act and in Rule 14a-2(b) under the Exchange Act that already address conflicts of interest, as well as inappropriate because the Advisers Act generally governs the activities of investment advisers, including proxy voting advice businesses.

201

In addition, some commenters believed that the proposed conflicts disclosure requirements would likely compromise the internal firewalls designed by proxy voting advice businesses to mitigate their risk of conflicts,

202

and could have a detrimental effect on competition in an industry that is already cost-prohibitive for new entrants.

203

195

See, e.g.,

letters from CalPERS; Canadian Governance Coalition; CII IV; JoAnn Hanson, President and CEO, Church Investment Group (Jan. 29, 2020) (“Church Investment Group”); Colorado PERA; Henry Beck, Maine State Treasurer, et al., Democratic Treasurers Association (Jan. 30, 2020) (“DTA”); Holly A. Testa, Director, Shareowner Engagement, First Affirmative Financial Network (Jan. 3, 2020) (“First Affirmative”); Jeffery W. Perkins, Executive Director, Friends Fiduciary Corporation (Feb. 2, 2020) (“Friends”); Glass Lewis II; ISS; Interfaith Center II; J. Coates, Professor of Law and Economics, Harvard Law School, and Barbara Roper, Consumer Federation of America (Jan. 30, 2020) (“Prof. Coates”); New York Comptroller II; PIAC II; Public Retirement Systems; ValueEdge I.

196

See, e.g.,

letters from Colorado PERA (“PERA utilizes research reports from Glass Lewis and ISS to assist with its evaluation of items on a proxy ballot. PERA has analyzed each firm's disclosures and management of conflicts of interest. We concluded that the potential conflicts are harmless to the independence of the research, would not sway an investor's opinion, and the existing firewalls to prevent contamination of objectivity—where applicable to specific proxy advisors—are sufficient”); CalSTRS; Glass Lewis II; ISS.

197

See, e.g.,

letters from CalPERS; Canadian Governance Coalition; CII IV; Church Investment Group; DTA; First Affirmative; Friends; Glass Lewis II; ISS; Interfaith Center II; New York Comptroller II; Colorado PERA; PIAC II; Prof. Coates; Public Retirement Systems; ValueEdge I.

198

See, e.g.,

letters from CalPERS (“We see no evidence that conflicts of interest with proxy advisors have led to voting advice that conflicts with our voting policies . . . It is not clear to what extent the SEC has reviewed all of the disclosures that proxy voting advice businesses already provide.”); CalSTRS; CII IV; Glass Lewis II; ISS; New York Comptroller II; Colorado PERA; PIAC II; ValueEdge I.

199

See, e.g.,

letters from CalSTRS (stating that while it is generally supportive of conflict of interest disclosure, it does “not believe the SEC needs to create a new regulatory structure to enforce such [conflict of interest] disclosure” and its general belief “that proxy advisors are currently providing adequate disclosures that meet the needs of investors, and any modifications to disclosures can be enforced through existing SEC authority.”); ISS; Glass Lewis II; CalPERS; New York Comptroller II.

200

See, e.g.,

letters from ISS (“. . . the fact that the most vocal critics of ISS in this area [regarding conflicts of interest] are those who speak on behalf of corporate management, and not the investors who rely on ISS' research and vote recommendations, indicates that ISS is managing this potential conflict extremely well.”); CalPERS; CalSTRS; Glass Lewis II; New York Comptroller II.

201

See, e.g.,

letter from ISS (asserting that “the proposal ignores the relevance of the Advisers Act regime and makes no attempt to explain why this framework is inadequate to address the Commission's purported concerns about proxy advice”). As noted above, 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.

See supra

notes 41 through 60 and accompanying text for a discussion of why we believe it is appropriate that proxy voting advice businesses be subject to applicable rules under Section 14(a) when they provide proxy voting advice, regardless of whether they are registered under the Advisers Act.

202

For example, according to ISS, it maintains a firewall between ISS Global Research, its core institutional business, and ISS Corporate Solutions, Inc. (“ICS”), a subsidiary which provides governance tools and services to corporate issuer clients. In its comment letter, ISS states that “a key goal of the firewall is to keep the ISS Global Research team from knowing the identity of ICS' clients,” which could be jeopardized by disclosure of the details of ICS' business and potentially result in vote recommendations that are biased in favor of corporate management. As part of its conflicts of interest policies, Glass Lewis blocks its research analysts from any access to the holdings, custom policies and/or voting activity of its two co-owners, the Ontario Teachers' Pension Plan Board and Alberta Investment Management Corp.

See e.g.,

letters from CII IV; Glass Lewis II; ISS.

See also

IAC Recommendation.

203

See, e.g.,

letters from CalPERS; CII IV; ISS; PERA (“This disclosure of . . . anything that may potentially be deemed a conflict of interest could result in advisors losing their competitive advantage.”); and the IAC Recommendation.

See also

letter from CFA Institute I (“We do not object to such increased transparency as long as these further disclosures do not compromise the competitiveness of a proxy adviser by forcing them to divulge trade secrets or other proprietary information, the disclosure of which would be deleterious to the specific adviser”).

Both those supporting and those opposing the proposed Rule 14a-2(b)(9)(i) recommended modifications to the proposed new disclosure requirements,

204

ranging from very specific suggestions intended to standardize the presentation of conflicts disclosures,

205

expand the breadth of required disclosure,

206

and capture certain detailed information,

207

to those that were less prescriptive and leaned toward a more principles-based approach,

208

with an emphasis on materiality.

209

Other commenters recommended certain substantive changes that would have widened the scope of the proposed amendments beyond conflicts disclosure.

210

204

See, e.g.,

letters from Lynette C. Fallon, EVP HR/Legal and General Counsel, Axcelis Technologies, Inc. (Jan. 20, 2020) (“Axcelis”); Baillie Gifford; BRT; CEC; CII IV; CIRCA; Exxon Mobil; Garmin; Glass Lewis II; ISS; Jonathan Chanis, New Tide Asset Management, LLC (Jan. 30, 2020) (“J. Chanis”); Mylan; Ann McGinnis, Co-President et al., Los Angeles Chapter, National Investor Relations Institute, Los Angeles Chapter (Feb. 3, 2020) (“NIRI-LA”); David Erickson, President, et. al., National Investor Relations Institute, Orange County Chapter (Feb. 4, 2020) (“NIRI-OC”); June M. Vecellio, President, and James B. Bragg, Advocacy Ambassador, National Investor Relations Institute, Connecticut/Westchester County Chapter (Feb. 6, 2020) (“NIRI-Westchester”); Nasdaq; Prof. Li; SCG; Seven Corners; SES; Linda Moore, President and CEO, TechNet, (Feb. 3, 2020) (“TechNet”).

205

See, e.g.,

letters from Nasdaq; NIRI-LA; NIRI-OC; NIRI-WC; TechNet (calling for conflicts of interest to be disclosed on the front page of proxy voting advice).

206

See, e.g.,

letters from ExxonMobil (supporting a requirement for specific disclosures about proxy voting advice businesses' specialty reports that are driven by goals other than maximizing shareholder value); SCG (recommending that proxy voting advice businesses be required to disclose “any interest, transaction or relationship that may present a conflict of interest, and the dollar amount thereof”).

207

See, e.g.,

letters from ExxonMobil (recommending that required conflict disclosures cover details similar to the requirements of Item 404(a) of Regulation S-K and enumerating a list of specific items that should be addressed by disclosure); PIRC (suggesting that disclosure of specific amounts of compensation received from various clients could be helpful).

208

See, e.g.,

letters from Baillie Gifford (cautioning that requiring disclosure of policies and procedures would lead to boilerplate disclosure); CII IV (asserting that allowing proxy voting advice businesses to choose the vehicle by which they disclose conflicts of interest would mitigate the widespread distribution of information that could affect competitive or other concerns); CIRCA (stating that a principles-based approach “would prevent proxy advisors from giving boilerplate disclosures . . . without creating unprecedented and excessive burdens.”); ISS (stating that “there is no reason to treat conflict disclosure by proxy advisers any differently from the way conflict disclosure by portfolio managers or any other type of investment adviser is treated.”); S. Holmes.

209

See, e.g.,

letter from Baillie Gifford.

210

See, e.g.,

letters from Garmin (recommending that the Commission require proxy voting advice businesses to separate their proxy advisory businesses from their consulting businesses); J. Chanis (recommending that the Commission prohibit proxy voting advice businesses from also providing consulting services to companies that are the subject of their proxy voting advice).

3. Final Amendments

We are adopting amendments to Rule 14a-2(b) to require that persons who provide proxy voting advice in reliance on the exemptions in either Rule 14a-2(b)(1) or (b)(3) must include in their voting advice to clients the conflicts of interest disclosure specified in new Rule 14a-2(b)(9)(i). The Commission is adopting these amendments substantially as proposed, but with certain modifications as discussed below, to clarify and streamline the rule in response to commenters' concerns and suggestions.

As adopted, Rule 14a-2(b)(9)(i) establishes a principles-based requirement, based on a standard of materiality, that will apply to all proxy voting advice that is provided in reliance on the exemptions in Rules 14a-2(b)(1) and (b)(3). Contrary to the views of some commenters, we do not see this requirement as imposing an entirely new regulatory regime or structure.

211

Rather, we view Rule 14a-2(b)(9)(i) as enhancing the existing conflicts of interest disclosures that proxy voting advice businesses currently provide in order to rely on the exemptions from the proxy rules' information and filing requirements. By articulating a standard for disclosure that focuses on information that would be material to assessing the objectivity of the proxy voting advice, the new rule is expected to result in disclosure that is more tailored and comprehensive than would be required under either Rule 14a-2(b)(1) or (b)(3).

212

Given the significant role played by proxy voting advice businesses in the voting process, we believe that the articulation of clear minimum disclosure standards is appropriate to better ensure transparency, accuracy, and completeness in the information provided, as well as the integrity of the proxy voting process. Rule 14a-2(b)(9)(i)

is intended to harmonize the conflicts of interest disclosure that proxy voting advice businesses provide to their clients, helping to ensure that sufficient information about material conflicts of interest is disclosed more consistently across proxy voting advice businesses and in a manner readily accessible to the clients of such businesses. As a consequence, we believe the rule will enable clients of proxy voting advice businesses to make more informed voting decisions, including with regard to how proxy voting advice businesses identify and address conflicts of interest on a business-specific and relative basis and help in Commission oversight of the proxy voting process.

213

211

See, e.g.,

letters from CalSTRS ([W]e do not believe the SEC needs to create a new regulatory structure to enforce such disclosure.”); Glass Lewis II (“Accordingly, this issue [of conflicts of interest disclosure] does not present a basis for a wholesale new and burdensome regulatory regime . . . .”).

212

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). It should be noted that both exemptions 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 institutional investors.

213

Currently, proxy voting advice businesses differ in how they disclose their conflicts of interest. For example, 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 appear 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 (2019) (“ISS FAQs”),

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

See also

Proposing Release at 66527, n. 90; letter from Glass Lewis II.

Although some proxy voting advice businesses and others have asserted that the businesses' existing practices and procedures adequately address conflicts of interest concerns,

214

we believe that the absence of a disclosure requirement specifically contemplating the conflicts of interest that can arise for proxy voting advice businesses in relation to proxy voting advice means that there has not been a sufficient standard against which clients may assess the quality of the conflicts disclosures they receive. Conditioning the exemptions in Rules 14a-2(b)(1) and (3) for proxy voting advice on the proxy voting advice business's adherence to a set of minimum, principles-based disclosure standards will make clear what constitutes basic information regarding conflicts of interest that all parties can expect when receiving voting advice and will bolster the completeness and consistency of such disclosure by making it a regulatory requirement. This should in turn foster greater confidence in the services proxy voting advice businesses offer to their clients and provide greater assurance to market participants that shareholders' interests are being properly considered through a well-functioning proxy system.

215

214

See supra

note 200 and Proposing Release at 66544 n.226.

215

See infra

Section IV.A.

To that end, Rule 14a-2(b)(9)(i) sets forth a concise framework that applies to any person providing proxy voting advice within the scope of proposed Rule 14a-1(l)(1)(iii)(A) who wishes to utilize the exemption in either Rule 14a-2(b)(1) or (b)(3). Such persons must include in their voting advice (or in any electronic medium used to deliver the advice) prominent disclosure of:

• Any information regarding an interest, transaction, or relationship

216

of the proxy voting advice business (or its affiliates) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship;

217

and

216

Such information may include disclosure about certain business practices in which the proxy voting advice business engages that might reasonably be expected to call into question its objectivity and the independence of its advice. For example, it may be appropriate in some circumstances under the rule for a proxy voting advice business to disclose its practice of selectively consulting with certain clients before issuing its benchmark voting recommendation on a specific matter (

e.g.,

a contested director election or merger). This may particularly be the case in situations in which the clients with whom the proxy voting advice business consults are not directly involved as a party to the specific matter but are expected to receive proxy voting advice on the matter. Such a practice could allow for those consulted clients' voting preferences to influence recommendations given to other clients that were not consulted and importantly, without the knowledge of those clients not consulted.

217

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

• 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.

218

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

The rule, as adopted, reflects our intent to avoid an overly prescriptive disclosure requirement with specific monetary thresholds, in favor of a more principles-based rule that is sufficiently flexible to encompass a wide variety of circumstances that may not fall within pre-determined parameters but nevertheless could materially impact a client's assessment of the proxy voting advice business's objectivity. This approach also is consistent with the views of several commenters who favored a principles-based disclosure requirement that could more easily accommodate a variety of different facts and circumstances.

219

As such, Rule 14a-2(b)(9)(i) establishes a general standard for conflicts of interest disclosure, but allows the proxy voting advice business to apply its judgment and unique knowledge of the facts to determine the materiality of conflicts that might pose a risk to the objectivity of its advice.

219

See, e.g.,

letters from Baillie Gifford; CII IV; CIRCA, Glass Lewis II; ISS (“Proxy advisers should be governed by a principles-based regulatory regime. For this reason, the Commission should not require such firms to disclose specific qualitative or quantitative information or impose prescriptive standards regarding the method of conflict disclosure.”).

The final rule also gives the proxy voting advice business flexibility to determine the precise level of detail needed about any identified conflicts of interest,

220

or whether a relationship or interest that has been terminated should nevertheless be disclosed.

221

In each particular case, the rule gives the proxy voting advice business the discretion to determine which situations merit disclosure and the specific details to provide to its clients about any conflicts of interest identified. The key determinant will be whether the information is material to an evaluation of the proxy voting advice business's objectivity.

220

For example, the proxy voting advice business would have the discretion, on a case-by-case basis, to determine whether specific monetary amounts related to any potential and/or actual conflicts identified should be disclosed.

See

letter from CII IV (“We do not believe that proxy voting advice businesses should be required to disclose the specific amounts that they receive from the relationships or interests covered by the proposed conflicts of interest disclosures . . .

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