In a three-to-two vote, the SEC approved (i) guidance on an investment adviser’s responsibilities in proxy voting and in vetting any advice that the adviser may itself receive from a proxy advisor, and (ii) an interpretation and related guidanceon rules for solicitation of proxies and proxy voting advice.
In the proxy-adviser guidance, the SEC clarified an investment adviser’s fiduciary duty and obligations under Advisers Act Rule 206(4)-6 (“Proxy Voting”) in connection with an adviser’s proxy voting for clients. In its guidance, the SEC:
- recognized that the adviser-client relationship should not be handled with a “one-size-fits-all” approach; and
- recognized the wide variety of ways that investment advisers can use proxy advisory firms’ services while fulfilling their fiduciary duty to clients.
SEC Commissioner Elad L. Roisman voted in favor of the guidance, asserting that it (i) conforms to the Proxy Voting Rule’s flexible, principles-based approach to investment advisers’ proxy voting responsibilities, (ii) modernizes the Staff Legal Bulletin 20 (“SLB 20”) and (iii) highlights the importance of serving a client’s best interests.
SEC Commissioner Robert J. Jackson, Jr. dissented, expressing concern that the guidance would further concentrate the “proxy-advisory industry” due to the additional costs of compliance. According to Mr. Jackson, smaller institutions may not be able to bear the necessary costs, which could lead smaller investors to opt out of voting. Mr. Jackson noted that although the “role of proxy advisors has been hotly debated for decades,” all sides know that a competitive market helps both investors and issuers.
SEC Commissioner Allison Herren Lee voted against the guidance, saying that it “creates significant risks to the free and full exercise of shareholder voting rights.” Specifically, Ms. Lee criticized the guidance stating it:
- would increase costs and “time pressure”;
- would require more issuer involvement, despite “widespread agreement” that it would “undermine the reliability and independence of voting recommendations”; and
- should undergo a notice and comment period or a cost-benefit analysis.
Interpretation and Guidance on Proxy Voting Advice
The SEC also provided an interpretation of SEA Rule 14a-1 (“Solicitation of Proxies – Definitions”). The SEC stated that proxy voting advice by a proxy advisory firm generally constitutes a solicitation under federal proxy rules. The SEC clarified that solicitations that are exempt from proxy filing requirements nonetheless remain subject to SEA Rule 14a-9 (“False or Misleading Statements”).
Commissioner Roisman supported the interpretation of SEA Rule 14a-1, emphasizing that it reiterates previous SEC statements that proxy voting advice is generally considered a “solicitation” under the rule. Mr. Roisman said that the interpretation will not interfere with proxy advisory firms’ ability to rely on information and filing exemptions under the federal proxy rules. Further, Mr. Roisman stated that the guidance on Rule 14a-9 offers “helpful” information on proxy voting advice, such as what information proxy advisors should disclose.
Commissioner Lee opposed the interpretation of SEA Rule 14a-1, stating that the SEC is planning to review the solicitation rules and may soon change the underlying exemptions. Ms. Lee highlighted the potential compliance burdens, which would force market participants to implement processes to comply with a regulatory framework that may soon change.
SEC Chair Jay Clayton stated that the interpretation and guidance provided a “first step” toward modernizing the proxy system. Mr. Clayton added that the SEC is also considering recommendations to amend SEA Rule 14a-2(b) (“Solicitations to Which § 240.14a-3 to § 240.14a-15 Apply”), which provides information and filing requirement exemptions. These exemptions, according to Mr. Clayton, were “adopted decades ago and warrant a fresh look.”
Investment advisers will need to take a close look, and a periodically ongoing look, at their proxy voting policies. Advisers should be mindful that nothing obligates them to vote their clients’ shares, as long as an adviser has made it clear in its agreement with its clients that it will not do so. For many advisers, voting shares will not be worth the effort.
Separately, the very interesting aspect of declaring that proxy advisors are subject to SEA Rule 14a-9 is that it imposes on proxy advisors a more significant burden to justify or support their advice and to disclose any conflicts related to that advice. Query whether the threat of liability under SEA Rule 14a-9 changes the way that proxy advisors go about their business?