Proxy Voting Guidance Update

David A. Bell and Ran Ben-Tzur are partners at Fenwick & West LLP. This post is based on their Fenwick memorandum.

In January 2020, Institutional Shareholder Services and the U.S. Securities and Exchange Commission agreed to stay litigation filed by ISS in October challenging the SEC’s interpretation and guidance related to voting recommendations of proxy advisers and their use. Announced in August 2019, the SEC’s guidance aims to enhance the accuracy and transparency of the information that proxy voting advice businesses provide to investors and others who vote on investors’ behalf. Importantly for our clients, the SEC has indicated that the interpretation and guidance “does not itself create any new or additional obligations and does not have the force and effect of law,” and that it would not invoke its August 2019 interpretation and guidance “as an independent source of binding law in any enforcement or other regulatory action” during the pendency of the stay, which has been granted by a court.


In August 2019, the SEC issued two sets of interpretive guidance, one regarding proxy advisory firms under the proxy solicitation rules, and one regarding investment advisers and their proxy voting responsibilities. Among other things, the SEC issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules (the interpretation and related guidance are described in our prior alert). At that time, the SEC did not seek public comment or propose or adopt any formal new rules.

In October 2019, ISS filed suit against the SEC challenging both the process by which the guidance was issued and the substance of the interpretation that its proxy voting advice constituted a “solicitation.”

In November 2019, the SEC proposed formal rulemaking that would codify the SEC’s recent interpretation that voting advice put out by proxy advisory firms are “solicitations” subject to the antifraud rules, and add additional conditions that must be met in order for proxy advisory firms to rely on the filing exemptions that have historically been available to them. The proposed rules would also require additional conflict of interest disclosure by proxy advisory firms in their vote recommendation materials, give subject companies the opportunity to review and comment on proxy advisory firms’ recommendations prior to publication, and potentially require the proxy advisory firm to include a hyperlink to a response statement from the company with such recommendations (the proposed rules are discussed in more detail in our prior alert).

In January 2020, ISS and the SEC agreed to until the earlier of the adoption of final rules under the November 2019 proposed rulemaking or January 2021. Both parties have otherwise reserved their positions and arguments in the litigation, if it were to emerge from the stay, including the SEC’s view that its August 2019 interpretation and guidance simply reflects existing law and provides potential ways to comply with such existing law.

The SEC rulemaking process is continuing, with the SEC considering the many comments submitted by interested parties, and final rules are anticipated in 2020. The application of the new rules will likely begin with the 2021 proxy season.

Conclusion and Recommendation

If adopted in anything like the form proposed, the rules will create important requirements for proxy advisory firms, give companies much greater ability to correct mistakes in their recommendations, potentially call out issues with these firms’ methodologies and otherwise provide a more readily accessible rebuttal argument for adverse recommendations.

A main thrust of the arguments against the proposed rules is that they are unnecessary and that the problems they are intended to address are not significant and/or are covered by existing rules. We expect that the SEC will consider the experience of companies in their dealings with proxy advisory firms as they relate to the issues the proposed rules are intended to address, giving the proxy advisory firms incentive to be mindful of their interactions with companies while the rulemaking is in process.

As a result, even while the stay is pending and the rulemaking is underway, we recommend that companies consider being more proactive in requesting advance copies of, and reviewing, proxy advisory firm recommendations and reaching out to them to identify any potential factual mistakes or issues, putting the onus on the proxy advisory firms to make the correction, as well as requesting an opportunity to provide a response with the proxy advisory firm recommendation.

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