On July 13, 2022, the Securities and Exchange Commission (SEC) voted to reverse several amendments to its proxy voting rules (the Final Amendments). The vote reversed some of the key voting rights advice provisions adopted in July 2020 (the 2020 Rules) under then-Chairman Jay Clayton. These changes should be effective 60 days after publication in the Federal Register, but may be subject to further changes depending on the outcome of pending litigation. In particular, several recent developments in lawsuits challenging the SEC’s decision to reverse the 2020 rules are likely to impact the implementation of the changes.
Current status of the Proxy Firm Rules
On Sept. 29, a Texas federal judge ruled that the SEC violated the Administrative Procedures Act by suspending enforcement of the 2020 Rules before allowing sufficient notice and comment. The National Association of Manufacturers filed a complaint in October 2021 after the SEC said it would not enforce the 2020 rules, which were passed toward the end of the Trump administration, while the commission debated whether to formally enforce the rules should change. At that point, proxy firms had until December 1, 2021 to comply with the new regulations.
The National Association of Manufacturers (NAM), which several other trade groups have joined, argued that the decision not to enforce the 2020 rules violated the Administrative Procedures Act (APA). The SEC filed a motion to dismiss the case on Sept. 13, arguing that the Division of Corporation Finance’s statement that it would not enforce the 2020 regulations was no longer in force since the commission revised in July of this year regulations approved. Judge David Counts denied the motion to dismiss, eventually finding that the SEC violated the APA by failing to establish a notice and comment period before announcing that it would not recommend enforcement of the 2020 rules. As a result of this decision, the SEC must again set a compliance date for the 2020 rules.
The SEC’s amended Proxy Advisory Rules are also being challenged in several other lawsuits. In addition to its lawsuit arguing that the SEC violated the APA when it ruled not to enforce the 2020 Rules, NAM has also filed a lawsuit to challenge the SEC’s July 2022 decision repealing the Rules. Judge Counts in the Western District of Texas is also overseeing this lawsuit and a summary judgment hearing is currently scheduled for December 9, 2022.
Separately, the U.S. Chamber of Commerce has filed a similar lawsuit alongside the Business Roundtable and the Tennessee Chamber of Commerce and Industry, arguing in part that the SEC failed to demonstrate new facts warranting the decision to repeal the 2020 rules. The groups filed a summary judgment motion in the US District Court for the Middle District of Tennessee on September 26, 2022, pending a ruling. A ruling in this case, or in the lawsuit filed by NAM, could halt the SEC’s proposed changes to its proxy advisory firm’s rules.
Summary of changes to the fixed proxy rules
The 2020 rules codified the SEC’s interpretation that proxy voting advice constitutes a “request” for purposes of voting rights rules and added new terms to the exceptions to these recruitment rules. Under the new final changes, proxy voting advice remains a solicitation subject to the proxy voting rules.1 However, the final changes repeal other provisions that affect proxy advisory firms:
Shareholder Engagement Provision
The final changes remove several conditions imposed by the 2020 rules that required proxy advisory firms to provide additional information to their clients and companies that are the subject of their advice. Under the 2020 Rules, proxy advisory firms were required to make their proxy voting advice available to affected entities at or before the time they offer that advice to their clients.2 The 2020 changes also require that proxy advice firms provide their clients with a mechanism to access any written responses to proxy advice received from the relevant firms. The final changes remove this rule. The SEC stated that this decision was made because of the “limited vested interests at stake” coupled with the existence of other mechanisms in the voting system that encourage an “informed shareholder vote.” 3
False or misleading statements
The final amendments also remove a provision describing the potential applicability of Rule 14a-9 to proxy advisory firms. The 2020 Rules amended Rule 14a-9 by adding examples in Note (e) that attempted to clarify when a proxy proxy recommendation might be considered misleading if it violates the Rule. The 2020 Rules provided in part that failure to disclose “material information relating to proxy advice” could be misleading within the meaning of the Rule. The final amendments remove note (e), although the SEC has emphasized that the removal of this specific note does not affect the potential application of Rule 14a-9 to proxy advice in general. This decision addresses concerns expressed by investors and proxy advisors that the 2020 Rules would have led to the erroneous assumption that Note (e) extends the applicability and scope of Rule 14a-9.
Supplementary instructions for proxy voting
Finally, the final amendments repeal supplemental guidance issued by the SEC that was designed in part to help investment advisers evaluate how to consider registrant responses to proxy voting advice. The SEC revoked that guidance in its July vote, stating that the Commission’s Proxy Voting Guidance 2019 already contains the information necessary to help investment advisers perform their duties under Rule 206(4)-6 of the Investment Advisers Act of 1940 support without the need for a separate manual.