SEC Guidance for Investment Advisers and Proxy Advisory Firms: An Analysis

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

At an open meeting [on August 21, 2019], the SEC voted (three to two) to publish guidance aimed at addressing some of the long-simmering controversy surrounding the reliance by investment advisers on proxy advisory firms. Do investment advisers rely excessively on proxy advisory firms for voting recommendations? How can they rely on proxy advisory firms and still fulfill their own fiduciary obligations? Are issuers allowed a fair chance to raise concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that forms the basis of a recommendation? Are conflicts of interest sufficiently transparent or addressed? What about the argument expressed by some that proxy advisory firms are essentially faux regulators with too much power and little accountability? (Ok, sorry, that last one didn’t come up.)

Guidance directed at investment advisors, while redolent of earlier non-binding staff guidance, now has the benefit of legal force in light of its adoption by the SEC. The new guidance revisits the extent to which an investment adviser can “outsource” to proxy advisory firms and still fulfill its fiduciary duty to its clients by, as Chair Jay Clayton summed it up, conducting “reasonable due diligence, reasonably identifying and addressing conflicts, and full and fair disclosure.” And the interpretation and guidance directed at proxy advisory firms confirms that their vote recommendations are “solicitations” under the proxy rules and subject to the anti-fraud provisions, and provides some “suggestions” about disclosures that would help avoid liability. The guidance and interpretation will be effective upon publication in the Federal Register.

So why should companies care? Certainly, the implications for companies appear rather attenuated and the actions taken by the SEC here distinctly low key. Those advocating or expecting to see the imposition of bolder requirements, such as rigorous regulation of proxy advisory firms or even affirmative requirements for these firms to check the facts with issuers, will be sorely disappointed. Instead, much like prior staff guidance, the new SEC guidance posits the investment adviser as “enforcer,” focusing on investment advisers’ policies and procedures for due diligence and oversight, especially as applied to the proxy advisory firms they engage.

The guidance recommends that investment advisers can satisfy their own fiduciary duties of care and loyalty and obligations to act in their clients’ best interests, in part, through careful oversight of proxy advisory firms, such as by monitoring and analyzing the methodology and processes of proxy advisory firms, including their processes for engagement with companies and procedures to address errors. For example, the guidance recommends that, in the event of error, investment advisers consider the proxy advisory firm’s “process, if any, for investment advisers to access the issuer’s views about the firm’s voting recommendations in a timely and efficient manner.” In theory at least, investment advisers will be enabled to leverage the enhanced due diligence recommendations set forth in the guidance to insist that proxy advisory firms up their games: improve their due diligence processes with regard to their voting recommendations; be more transparent about their methodology; develop better processes to engage with issuers to verify information; be more responsiveness in correcting errors that issuers identify; and consider each issuer individually in the context of its unique circumstances in developing recommendations.

In addition, the renewed emphasis on potential liability of proxy advisory firms for misleading material statements or omissions in their solicitation communications may enhance the level of care and responsiveness of proxy advisory firms, and the specific recommendations for disclosures that proxy advisory firms should consider providing to avoid potential liability may enhance the transparency of their communications. While the focus on investment advisers’ process for monitoring proxy advisory firms—and especially for addressing their factual errors—will be appreciated, whether this restrained approach will give companies a fair shot at raising concerns about proxy advisory firm recommendations, and especially about errors and incomplete or outdated information on which a recommendation is based, remains to be seen.

At the Meeting

The actions taken by the SEC might be described as rather modest, and the majority of the Commissioners seemed to celebrate that aspect. In his introductory remarks at the open meeting, Commissioner Elad Roisman, who headed up the effort at the SEC, adverted to the hundreds of public companies, investor groups and individual investors that had submitted comments in connection with the SEC’s proxy roundtable expressing “varying concerns relating to the influence that proxy advisory firms appear to have over proxy voting decisions in our markets.” Nevertheless, he stressed that the new guidance “would not change the law or create a new regulatory regime for proxy advisory firms, but reiterate longstanding Commission rules and positions that remain applicable and very relevant in today’s marketplace.”

That position was echoed by Clayton. “Voting proxies is important” is how SEC Chair Jay Clayton opened his remarks (almost). He emphasized that “investment advisers who assume voting authority have duties of care and loyalty to their clients in fulfilling their voting obligations. The guidance we are considering today emphasizes these fundamental truths.” He believed that the guidance should help investment advisers that retain proxy advisory firms by clarifying “issues that they should consider, such as conflicts of interest and accuracy of information, in each case depending on the relevant circumstances. These potential actions discussed in the guidance are not new.”

Commissioner Hester Peirce characterized the SEC’s actions in issuing the new guidance as “not building a new regulatory regime, but …explaining the contours of an existing one to help investment advisers and proxy advisors carry out their responsibilities.” She greeted the guidance as a “welcome departure from our past over-reliance on staff guidance,” noting that the guidance does not “prescribe what investment advisers and proxy advisors must do to carry out their responsibilities, but they describe some things these firms might consider to help them accomplish those goals.” Roisman pointed out, however, that this guidance was just the first of several matters related to proxy voting that he hoped the SEC would soon be addressing, including proposed rules to amend the submission and resubmission thresholds for shareholder proposals and proposed rule amendments to address proxy advisory firms’ reliance on the proxy solicitation exemptions in Exchange Act Rule 14a-2(b).

The two dissenting Commissioners, Robert Jackson and Allison Lee, objected to the failure by the SEC to study the potential impact of the guidance, which they thought could be significant. Jackson expressed his concern that the guidance “may alter the competitive landscape for the production and use of that advice [from proxy advisory firms]—without addressing whether doing so might make it harder for investors to oversee management.” He explained that the difficulty and cost involved in monitoring public companies leads many institutional investors to rely on proxy advisory firms. Although large institutions can afford to comply with the steps outlined in the guidance, “smaller ones may be less able to bear the costs of doing so. If smaller investors respond to these costs simply by choosing to vote less, the result may be to give more influence to large institutions. We should carefully consider the consequences of that possibility before making policy in this area.” Likewise, he was troubled that the guidance would increase the cost for proxy advisory firms, deterring new entrants and increasing the concentration in an already concentrated industry. He “would have considered the effects of today’s guidance on the competitive landscape more fully before taking these steps.” (For a discussion of more pointed observations by Jackson regarding regulation of proxy advisory firms, see this PubCo post.)

Lee, in her first open meeting, also dissented, contending that the new guidance “introduces increased costs and time pressure into an already byzantine and highly compressed process. Second, it calls for more issuer involvement in the process despite widespread agreement among institutional investors and investment advisers that greater involvement would undermine the reliability and independence of voting recommendations.” She also objected to a process that did not involve compliance with APA procedures, such as notice and comment, or weigh costs and benefits. In addition, she disagreed that the guidance did not exceed existing non-binding staff guidance because SEC guidance

“commands attention and compliance. Although the release states that the very detailed approaches to assessing a proxy advisory firm are just examples of how an investment adviser could meet its fiduciary duties with respect to proxy voting, many of those examples are presented as steps the adviser in fact should take. A regulated entity ignores such direction at its peril. It may be that some of these specific measures are warranted, but the Commission has made a substantive policy choice without formally seeking input, justifying that choice to the public, or even identifying any benefits for investors.”

Finally, she opposed the guidance related to the solicitation rules, in light of anticipated, but undefined, changes to the exemptions from those rules.

Clayton countered her criticism regarding APA procedures with a pre-arranged Q&A with counsel at the table, in which counsel stated that the APA was not triggered by this action because the guidance was interpretive and no new obligations were created. Nor was an economic analysis required by SEC rules. Clayton also disputed Jackson’s claim that the guidance could cause some smaller investment advisers to vote less: “if anyone thinks that the guidance lessens the duty to vote,” he said, “I disagree.”


In this recent speech, Peirce expressed her concern for SEC staff guidance and interpretation that she seems to view as sometimes runaway or out-of-control and, sometimes, too much under the radar. A few days later, the Acting Director of the Office of Management and Budget joined in, distributing a memo designed to limit rules and guidance that federal agencies issue, particularly outside of the notice-and-comment process. As discussed in Compliance Week, the role of guidance, sometimes referred to by critics as “regulatory dark matter,” has been “one of the more contentious debates in compliance and legislative circles.” Critics argue that “over time ‘guidance’ has taken on a life of its own and either supplanted rulemaking or wedged resulting rules into previously unintended and unexpected matters.” The article identifies as reflective of this debate, for example, the 2016 “Better Way” plan for rulemaking reform issued by former House Speaker Paul Ryan, which “urged regulators to ‘rein in the use of guidance.’” The article also highlights a 2000 D.C. Circuit Court case, Appalachian Power Co. v. EPA, which invalidated guidance that the court viewed to have been treated as tantamount to law without the benefit of “notice and comment, without public participation, and without publication in the Federal Register.” Because the current guidance was adopted by the SEC itself, Peirce seemed to have no issue with it. (See this PubCo post.)

The Background

As fiduciaries, investment advisers owe their clients duties of care and loyalty with respect to services provided, including proxy voting. Accordingly, in voting client securities, an investment adviser must adopt and implement policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interest of its clients. In 2003, the SEC adopted a proxy voting rule for investment advisers, which requires advisers to follow the specific requirements of the rule in exercise voting authority to avoid characterization as “a fraudulent, deceptive, or manipulative act, practice or course of business.” In 2004, the staff of the Division of Investment Management issued two no-action letters, Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004), which provided staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms. The two letters indicated that one way advisers could demonstrate that proxies were voted in their clients’ best interest was to vote client securities based on the recommendations of an independent third party—including a proxy advisory firm—which served to “cleanse” the vote of any conflict on the part of the investment adviser. Historically, investment advisers have frequently looked to proxy advisory firms to fill this role. As a result, the staff’s guidance in those letters was often criticized for having “institutionalized” the role of—and, arguably, the over-reliance of investment advisers on—proxy advisory firms, in effect transforming them into faux regulators.

In response to frequently voiced criticisms that proxy advisory firms wielded too much influence—with too little accountability—in corporate elections and other corporate matters, in 2014, the SEC’s Divisions of Investment Management and Corp Fin issued Staff Legal Bulletin No. 20, “Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms,” which sought to reinforce the responsibilities of investment advisers as voters by reinvigorating their due diligence and oversight obligations with respect to any proxy advisory firms on which they relied. In that guidance, which is echoed in many ways in the SEC’s new guidance, the staff indicated additional steps that an investment adviser could take to demonstrate that proxy votes were cast in accordance with clients’ best interests. In addition, investment advisers were advised to “adopt and implement policies and procedures that are reasonably designed to provide sufficient ongoing oversight of the third party in order to ensure that the investment adviser, acting through the third party, continues to vote proxies in the best interests of its clients,” including measures to identify and address the proxy advisory firm’s conflicts on an ongoing basis. For example, the investment adviser was advised to ascertain, among other things, “whether the proxy advisory firm has the capacity and competency to adequately analyze proxy issues. (See this PubCo post.) The SEC’s new guidance and interpretation highlights the fact that the SLB represents only the views of the staff, was not approved by the SEC and has no legal force or effect.

Frequently disparaged (see this PubCo post), the two no-action letters identified above were withdrawn by the staff in September 2018, in anticipation of the SEC’s proxy roundtable. In the staff statement, the staff indicated that the notice of withdrawal of the two letters was provided to facilitate the discussion at the SEC’s 2018 Proxy Roundtable and that it intended to use information and feedback learned at the roundtable in making recommendations to the SEC with respect to proxy advisory firms, including with regard to SLB 20. While some expected the roundtable discussion of the power of proxy advisory firms to be something of a donnybrook, as it turned out, the discussion was remarkably tepid. Surprisingly, there did not seem to be much call for registration or other regulation of proxy advisors, possibly because of the fear of rising costs associated with registration and further regulation. There was, however, some discussion of conflicts of interest, difficulty in correcting erroneous records and so-called “robo-voting.” (See this PubCo post.)

Of course, beyond the roundtable, others have expressed strong views advocating proxy advisor regulation. A case for more comprehensive reform of the proxy advisory industry was presented in this 2018 proxy season survey from Nasdaq and the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. There, they observed that ISS and Glass Lewis control 97% of the industry, making them “de facto standard setters for corporate governance in the U.S.” However, they argue, they are plagued by conflicts of interest that affect their objectivity, adopt a one-size-fits-all approach, are unwilling to “constructively engage with issuers, particularly small and midsize issuers that are disproportionately impacted by proxy advisory firms,” lack transparency regarding the development of recommendations, and are prone to making analytical errors but unwilling to address them. Although regulators and legislators have taken some initial steps in overseeing the proxy advisory firms, they argued, more reform was needed. CCMC and Nasdaq conducted the survey during the 2018 proxy season including responses from 165 companies. The theme, they contended was that there had been few improvements: “Companies are bringing more issues to the attention of proxy advisory firms, but they still find it difficult to engage in constructive discussions that lead to better informed voting recommendations. Conflicts of interest still pervade the industry, and many report a lack of transparency into how recommendations are developed.” (See this PubCo post.)

In this article from March 2019, the WSJ reported that over 300 companies had “signed on to a February Nasdaq, Inc. letter calling for the SEC to take ‘strong action to regulate proxy advisory firms.’” These corporate groups, the WSJ reported, “are pushing the SEC to allow companies more leeway to address the firms’ recommendations before they are sent to shareholders, a process that would also allow them to flag any errors in the recommendations. Some corporate groups, including NAM, want the SEC to consider new registration requirements for proxy advisers and add new disclosure requirements related to possible conflicts of interest.” In addition, legislators seem to regularly introduce legislation, to no avail, that would require the SEC to regulate proxy advisers. See, for example, the Corporate Governance Fairness Act, introduced in 2018. (See also this PubCo post and this PubCo post.)

There has, however, been prominent opposition to that position. For example, in remarks to the SEC Speaks conference, Investor Advocate Rick Fleming identified proxy advisory firm regulation as one of ideas percolating at the SEC that he was “less enthusiastic about” (to put it mildly):

“I think it is fair to say that investors are wary about efforts to regulate proxy advisors. As many of you know, asset managers who hold shares in a wide range of companies face a logistical challenge in voting on numerous items each proxy season. Investment advisers are also required to vote shares in a way that is faithful to the fiduciary duties they owe their clients. To satisfy this obligation in a cost-effective way, many asset managers use the services of a proxy advisor. In addition to assisting with vote execution and regulatory reporting across markets globally, the advisors monitor the issues that are up for a vote, collect and analyze information and data, and give asset managers advice on how to vote their shares in accordance with the asset managers’ expressed wishes.

“Some have criticized proxy advisors and allege that they have conflicts of interest in their business models, factual errors in their analytical processes, and a political agenda that supports social policies at the expense of investment returns. All of these things would cause me great concern, except for one thing—the investors who are paying for this service are not the ones who are expressing those concerns. Indeed, at the Roundtable on the Proxy Process that the Commission held last November, I think the investors made it pretty clear that they are relatively happy with the services they receive from proxy advisors. This is not to suggest that proxy advisors are perfect, but to the extent that any problems exist, it seems that their paying customers should be the ones to raise them….So, if investors aren’t calling for increased regulation of proxy advisors, what is driving the push for regulation?… In my view,… the simple fact of the matter seems to be that proxy advisors have given asset managers an efficient way to exercise much closer oversight of the companies in their portfolios, and those companies don’t like it.”

In response to that critique, Roisman contended that, he did “not consider asset managers to be the ‘investors’ that the SEC is charged to protect. Rather, the investors that I believe today’s recommendations aim to protect are the ultimate retail investors, who may have their life savings invested in our stock markets.”

The Guidance and Interpretation

As indicated in the press release, the guidance recommended by the Division of Investment Management emphasizes the fiduciary obligations of care and loyalty applicable to investment advisors in fulfilling their proxy voting responsibilities under the Investment Advisers Act of 1940 and the Investment Company Act of 1940. The guidance to investment advisers addresses “the ability of investment advisers to establish a variety of different voting arrangements with their clients and matters they should consider when they use the services of a proxy advisory firm.” The guidance and interpretation recommended by Corp Fin is directed to proxy advisory firms and makes clear that “proxy voting advice provided by proxy advisory firms generally constitutes a ‘solicitation’ under the federal proxy rules,” while also confirming that the two key exemptions for those solicitations by proxy advisors continue to apply. The SEC also provided related guidance about the application of Rule 14a-9, the proxy antifraud rule, to proxy voting advice. In both cases, the guidance describes some non-exclusive ways in which entities can comply with these laws or regulations.

Proxy Voting Responsibilities of Investment Advisers

With respect to voting, the investment adviser’s duty of care requires the adviser to “have a reasonable understanding of the client’s objectives and… make voting determinations that are in the best interest of the client,” which means that the adviser must “conduct an investigation reasonably designed to ensure that the voting determination is not based on materially inaccurate or incomplete information.” In addition, in exercising voting authority, advisers are required, under Rule 206(4)-6 of the Advisers Act, “to adopt and implement written policies and procedures that are reasonably designed to ensure that the investment adviser votes proxies in the best interest of its clients.”

Investment advisers often retain proxy advisory firms to perform various functions, some of which are administrative or mechanical and some of which are substantive, including research and analysis regarding proposals up for votes and preparing voting guidelines and recommendations. The guidance revisits the extent to which an investment adviser can “outsource” to proxy advisory firms and still fulfill its fiduciary obligation to its clients. The guidance provides non-exclusive examples of suggested actions to facilitate compliance with advisors’ proxy voting responsibilities and encourages “investment advisers and proxy advisory firms to review their policies and practices in light of the guidance below in advance of next year’s proxy season.”

The guidance describes, among other things, how an investment adviser and its client can circumscribe the scope of the investment adviser’s authority and proxy-voting responsibilities; steps an investment adviser could take to demonstrate it is making voting determinations in a client’s best interest; considerations in connection with retaining and evaluating a proxy advisory firm; and whether an investment adviser is required to exercise every opportunity to vote. For example, to demonstrate that an investment adviser is making voting determinations in a client’s best interest and consistent with its voting policies, the guidance suggests that the adviser could review the proxy advisory firm’s “pre-populated” votes on its electronic voting platform or consider whether a higher degree of analysis is required for certain matters, such as highly contested or controversial proposals. In addition, in considering whether to retain a proxy advisory firm, the guidance recommends that the investment adviser should consider “whether the proxy advisory firm has the capacity and competency to adequately analyze the matters for which the investment adviser is responsible for voting. In this regard, investment advisers could consider, among other things, the adequacy and quality of the proxy advisory firm’s staffing, personnel, and/or technology.” More generally, the guidance recommends that the investment adviser also consider “what steps it should take to develop a reasonable understanding of when and how the proxy advisory firm would expect to engage with issuers and third parties.”

One part of the guidance discusses steps an investment adviser can “consider if it becomes aware of potential factual errors, potential incompleteness, or potential methodological weaknesses in the proxy advisory firm’s analysis that may materially affect one or more of the investment adviser’s voting determinations.” (For example, a company might file with the SEC additional soliciting material contesting purportedly factual statements on which the proxy advisory firm’s recommendation is based.) In that event, the guidance recommends that the investment adviser assess the effectiveness of the proxy advisory firm’s policies and procedures for obtaining accurate information, including:

  • “The proxy advisory firm’s engagement with issuers, including the firm’s process for ensuring that it has complete and accurate information about the issuer and each particular matter, and the firm’s process, if any, for investment advisers to access the issuer’s views about the firm’s voting recommendations in a timely and efficient manner;
  • “The proxy advisory firm’s efforts to correct any identified material deficiencies in the proxy advisory firm’s analysis;
  • “The proxy advisory firm’s disclosure to the investment adviser regarding the sources of information and methodologies used in formulating voting recommendations or executing voting instructions; and
  • “The proxy advisory firm’s consideration of factors unique to a specific issuer or proposal when evaluating a matter subject to a shareholder vote.”

In the event of error, the guidance advises the investment adviser to intensify its own investigation and analysis of the proxy advisory firm’s processes and procedures, including its engagement with issuers and efforts to correct the error, as well as the proxy advisory firm’s “process, if any, for investment advisers to access the issuer’s views about the firm’s voting recommendations in a timely and efficient manner.” Time will tell whether this guidance will ultimately lead proxy advisory firms to improve their own processes, develop a process that allows investment advisers to access the issuer’s views about the firm’s voting recommendations or lead them to be more responsiveness to issuers in correcting errors.

Further, the guidance indicates that investment advisers should consider whether the proxy advisory firm has an effective process for seeking “timely input” from issuers on matters such as

“its proxy voting policies, methodologies, and peer group constructions, including for ‘say-on-pay’ votes. For example, if peer group comparisons are a component of the substantive evaluation, the investment adviser should consider how the proxy advisory firm incorporates appropriate input in formulating its methodologies and construction of issuer peer groups. Where relevant, an investment adviser should also consider how the proxy advisory firm, in constructing peer groups, takes into account the unique characteristics regarding the issuer, to the extent available, such as the issuer’s size; its governance structure; its industry and any particular practices unique to that industry; its history; and its financial performance.”

The guidance also suggests that, in deciding to retain a proxy advisory firm, investment advisers should conduct a reasonable review of the proxy advisory firm’s policies and procedures regarding how it identifies, discloses and addresses conflicts of interest, including conflicts arising out of “the provision of recommendations and services to issuers as well as proponents of shareholder proposals,” conflicts arising out of “activities other than providing proxy voting recommendations and proxy voting services,” such as consulting services, and conflicts presented by certain affiliations, such as a third party with significant influence over the proxy advisory firm. The investment adviser should also consider whether the policies and procedures provide for adequate disclosure of actual and potential conflicts, including whether the proxy advisory firm’s policies “use technology in delivering conflicts disclosures that are readily accessible.” The guidance also recommends that investment advisers consider establishing policies and procedures to identify and evaluate a proxy advisory firm’s conflicts of interest that can arise on an ongoing basis.

In addition, the guidance indicates that investment advisers are not required to exercise every opportunity to vote where, for example, the adviser determines that the cost to the client of voting the proxy exceeds the expected benefit to the client or refraining from voting is otherwise in the client’s best interest. Theoretically, at least, this new advice may lead to lower vote totals at shareholders’ meetings, require more effort by companies and their delegates in corralling the vote, and perhaps as suggested by Jackson, put even more voting power in the hands of the large institutions.

Interpretation and Guidance to Proxy Advisory Firms Regarding the Federal Proxy Rules and Proxy Voting Advice

Rule 14a-1(l) provides that a solicitation includes communications seeking to influence votes and communications to security holders “under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” This new interpretation and guidance regarding the proxy rules emphasizes that proxy voting advice by proxy advisory firms constitutes a “solicitation” within the meaning of the Rule, regardless of whether the person is seeking authorization to act as a proxy and even if the person seeking influence is indifferent to the outcome.

Proxy advisory firms typically provide clients with proxy voting advice that describes the specific proposals and provides a “vote recommendation.” They may also “make recommendations for a particular investment adviser based on the advisory firms’ application of the investment adviser’s voting criteria.” The voting recommendations are typically provided with the expectation that the investment adviser will use them to assist in fulfilling their fiduciary duties when making their voting decisions. That idea is underscored by the timing of the recommendations “shortly before shareholders’ meetings. In addition, proxy advisory firms typically “market their expertise in researching and analyzing” proposals and are paid a fee. In the SEC’s view, that voting advice is not “unsolicited.” As a result, the SEC believes that “proxy voting advice provided by proxy advisory firms generally constitutes a solicitation subject to the federal proxy rules.” That view generally still holds even if the proxy advisory firm is providing recommendations (not ministerial services) based on its application of the investment adviser’s own tailored voting guidelines, and even if the client does not follow the advice. The SEC noted that, as long as the proxy advisory firms comply with the applicable conditions, they may still rely on the Rule 14a-2(b) exemptions from the proxy rules’ information and filing requirements, including relief from the obligation to file a proxy statement. As noted above, however, those exemptions are under review for potential future amendment.

In addition, in the interpretation and guidance, the SEC underscored that the anti-fraud provisions of Rule 14a-9 are applicable to proxy advisory firms’ soliciting communications. That Rule prohibits any solicitation, even exempt solicitations, 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.” In addition, the “solicitation must not omit to state any material fact necessary in order to make the statements therein not false or misleading.” According to the interpretation, “Rule 14a-9 also extends to opinions, reasons, recommendations, or beliefs that are disclosed as part of a solicitation, which may be statements of material facts for purposes of the rule.” In support of that position, the SEC cites Virginia Bankshares, Inc. v. Sandberg, from 1991, in which SCOTUS found a board’s recommendation to provide “statements of material facts because ‘[s]uch statements are factual in two senses: as statements that the directors do act for the reasons given or hold the belief stated and as statements about the subject matter of the reason or belief expressed.’”

Accordingly, to avoid Rule 14a-9 concerns, “disclosure of the underlying facts, assumptions, limitations, and other information” may be necessary. To avoid violations of Rule 14a-9, the guidance advises proxy advisory firms to consider disclosing:

  • “an explanation of the methodology used to formulate its voting advice on a particular matter (including any material deviations from the provider’s publicly-announced guidelines, policies, or standard methodologies for analyzing such matters) where the omission of such information would render the voting advice materially false or misleading;
  • “to the extent that the proxy voting advice is based on information other than the registrant’s public disclosures, such as third-party information sources, disclosure about these information sources and the extent to which the information from these sources differs from the public disclosures provided by the registrant if such differences are material and the failure to disclose the differences would render the voting advice false or misleading; and
  • “disclosure about material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts.”

More specifically, with regard to methodology, the guidance advises that, if the advice is “materially based on a methodology using a group of peer companies selected by the proxy advisory firm, the disclosure may need to include the identities of the peer group members used as part of its recommendation and the reasons for selecting these peer group members as well as, if material, why its peer group members differ from those selected by the registrant. For example, such disclosure may be needed for a voting recommendation on a registrant’s advisory vote on an executive compensation proposal that is based on a comparison of the registrant’s executive compensation policies to those of other companies selected by the proxy advisory firm.”

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