On November 5, 2019, the Securities and Exchange Commission in a 3-2 vote proposed new rules on two high profile topics: proxy advisory firms[1] and shareholder proposals[2]. New rules on these topics have been anticipated since the SEC added the items to its semi-annual agenda in late May. SEC Chairman Jay Clayton stated that the proposals are part of the SEC’s ongoing work to “enhance the accuracy, transparency and effectiveness of our proxy voting system” and that both are “rooted in two essential aspects of effective regulation—modernization and retrospective review.”

Proxy Advisory Firms

Today’s proposed rules would revise the existing proxy advisory rules in three significant ways:

  • require disclosure of material conflicts of interest in proxy voting advice,
  • require proxy advisory firms to give companies an opportunity to review and provide feedback on proxy voting advice before it is issued, and
  • allow companies to require proxy advisory firms to include in their voting advice a hyperlink directing recipients to the company’s views on the voting advice provided.

Notably, if adopted as proposed, companies that wish to review and provide feedback on proxy voting advice would need to file their proxy materials at least 25 days before their annual or special meeting date, which in some situations may be earlier than many public companies would otherwise file.

In Chairman Clayton’s public statement regarding the proposed rules he highlighted the evolution of the shareholder landscape and the reliance of investment advisers on proxy advisors, drawing an analogy between proxy advisory firms and “other significant third-party market participants…including auditors, rating agencies and research analysts” in justifying the need for modernized rules in this space.

The proposed rules follow Commission level guidance[3] released in August of this year that clarifies the SEC’s position that proxy voting advice provided by proxy advisors generally constitutes a solicitation subject to the federal proxy rules and Securities Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.[4]

Shareholder Proposals

The SEC also proposed revisions to the shareholder proposal rule in three significant ways:

  • tightening the criteria that a shareholder must satisfy to be eligible to have a shareholder proposal included in a company’s proxy statement by providing three alternative thresholds a shareholder could satisfy as follows: (i) continuous ownership of at least $2,000 of the company’s securities for at least three years; (ii) continuous ownership of at least $15,000 of the company’s securities for at least two years; or (iii) continuous ownership of at least $25,000 of the company’s securities for at least one year.
  • updating the “one proposal” rule to clarify that a single person directly or indirectly may not submit multiple proposals at the same meeting, and
  • increasing the threshold vote required for a shareholder proposal to be resubmitted to 5% in year one after first submission (currently 3%), 15% in year two after first submission (currently 6%) and 25% in year three after first submission (currently 10%), and adding a new provision that would allow for exclusion of a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25% of the votes cast on its most recent submission, if the proposal (i) received less than 50% of the votes cast and (ii) experienced a decline in shareholder support of 10% or more compared to the immediately preceding vote.

Chairman Clayton stated that the shareholder proposal rule and in particular the resubmission thresholds were “ripe” for review and emphasized the Commission’s findings regarding the shift from retail investors to institutional investors from the 1950’s when the thresholds were last amended to today. Commissioner Elad L. Roisman noted that increased shareholder engagement efforts over the years, coupled with the internet and social media, have provided shareholders with cheap and easily-accessible ways to communicate with companies.

Anticipated Market Response

The Commission clearly anticipates the likelihood of heated market response to these proposals. The Commissioners in favor of the proposals emphasized the work Commission staff put in to researching and drafting the proposed rules and making choices. SEC Commissioner Robert J. Jackson, Jr. expressed his view that the proposed rule changes would “shield CEOs from accountability to investors” and emphasized that the rule proposals were just that, proposals, encouraging shareholders to engage with the SEC in developing the final rules.

Ultimately, some may view the proposals as company-friendly, limiting the ability of proxy advisory firms to advise their investor clients and restricting investor access to the proxy system, while others may view the proposals as welcome modernizations of the current rules in response to the impact of outside influence on investor voting decisions. Either way, the SEC will likely receive a great deal of feedback in response to the proposals and will have its work cut out for it in determining whether the lines it has drawn remain on solid ground.

The proposed rules will be subject to a 60-day public comment period.

[1] Proposed Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice, available here: https://www.sec.gov/rules/proposed/2019/34-87457.pdf

[2] Proposed Amendments to Modernize Shareholder Proposal Rule,  available here:  https://www.sec.gov/rules/proposed/2019/34-87458.pdf

[3] Guidance – Proxy Voting Responsibilities of Investment Advisers, available here: https://www.sec.gov/rules/interp/2019/ia-5325.pdf; Interpretation and Guidance – Applicability of the Proxy Rules, available here: https://www.sec.gov/rules/interp/2019/34-86721.pdf

[4] For further information on the SEC’s August guidance, see ‎https://www.lockelord.com/newsandevents/publications/2019/08/proxy-voting-and-voting-‎advice–sec-provides-guida and ‎https://www.lockelord.com/newsandevents/publications/2019/09/proxy-advisory-firms.

Institutional Shareholder Services (ISS) sued the SEC on October 31, 2019, challenging the ‎SEC’s authority to issue substantive guidance on these issues in place of promulgating rules ‎pursuant to the required notice and comment procedures.‎