Statement by Commissioner Roisman at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Thank you, Chairman Clayton. I want to express my gratitude for your continuing commitment to improving the proxy system, as well as for your thoughtful leadership throughout the process of developing this rulemaking in particular. Thank you also to Director [Bill] Hinman, Val Afshar, Director [S.P.] Kothari, Director [Dalia] Blass, and Tara Varghese for your presentations and all of the incredible work you and your teams have put into these recommendations. You should be very proud.

Introduction

From the outset of my tenure as an SEC Commissioner, I have focused on reviewing the proxy voting infrastructure, seeking to learn more about how it is operating in practice, where our rules should be modernized, or where the system could be improved. [1] Early on, I realized that we needed to update and clarify our rules that are relied on by businesses that provide professional proxy voting advice and other services to investment advisers as well as other institutional investors.

Of course, calls for regulatory action in this area predate my time here by well over a decade. We have heard from members of Congress, the Government Accountability Office, former members of the Commission, and public companies, among others. [2] These calls have grown louder as institutional ownership of U.S. public companies’ equity has increased to unprecedented levels and rendered the voting advice sold by proxy voting advice businesses more widely consumed—and influential—than ever before. [3] The Commission has listened to the same concerns, over and over, in different settings, including at public roundtables, in private meetings, and at Congressional hearings. [4] Congress has not only debated the issues, but members in both chambers, and in both parties, have called for greater oversight of proxy voting advice businesses. [5]

Advocates for reform have argued that new regulations are needed to address conflicts of interests, factual errors, and methodological biases in these businesses’ proxy voting advice. They have also called for the Commission to reaffirm the principle that asset managers may not rely on this advice wholesale and to address the practice of so-called “robo-voting.” Of course, others have opposed any SEC action in this area, advocating instead that the SEC dismiss these persistent calls for reform and simply do nothing.

In November of last year, the Commission preliminarily decided that doing nothing was not the right thing to do. We voted to propose amendments that would update the federal proxy rules and, specifically, the exemptions upon which proxy voting advice businesses rely when providing voting advice to their clients. [6] Our proposed amendments drew thousands of comments from the public. [7] Some called for stricter regulation of proxy voting advice businesses and the services they offer, including limits on features that facilitate robo-voting by their clients. Others raised concerns about how implementing the proposed amendments would detract from their clients’ ability to review proxy voting advice.

I have taken many meetings to discuss the proxy voting process and proxy voting advice businesses since I became a Commissioner, particularly since we voted on the proposed amendments last November. I have met with proponents and opponents of reform and have travelled to hear from people with views that span the spectrum. For those who engaged with me and my team, I thank you. For those who submitted comments to our file, I thank you, too. I have learned a great deal from the information you have shared.

Out of all the feedback we received, one point seemed to be universally acknowledged: proxy voting advice businesses play a significant role in the proxy voting system as it has developed. Their voting advice is used by many investment advisers and institutional investors who manage money and vote on behalf of Main Street investors. Proxy voting advice businesses’ clients believe their advice is material and market-moving. [8] The fact that these few businesses have assumed such a far-reaching role in our markets as they do today compelled us to look to see whether our current rules continue to further our mission or whether updates are appropriate given these changes in our markets. [9] Our review demonstrates that Commission action is not only appropriate, but perhaps overdue. Especially since, in my view, two SEC staff no-action letters may have contributed to investment advisers using their services in a manner that could not reasonably have been expected when the staff letters were issued. These two no-action letters are no longer in effect, having been withdrawn by the Division of Investment Management in 2018. [10]

I am grateful to the SEC staff in our rulemaking divisions who met with interested parties about our proposal, reviewed each of the submitted comment letters, and used their experience and insights to make appropriate changes to the proposal and produce the rulemaking we are considering today. I also want to express my gratitude for our hardworking attorneys in the Office of the General Counsel, who provided valuable guidance to the rulemaking team on how best to address commenters’ concerns, including constitutional concerns raised by commenters that fell outside the scope of the securities laws. I believe our rulemaking is better because of all these efforts. I am also grateful to the staff in our Division of Investment Management. Not only have they been engaged in this rulemaking from the perspective of its effects on investment advisers that are clients of proxy voting advice businesses, but they have worked to supplement it and provide greater clarity with new guidance to such advisers. [11]

I am supportive of both recommendations and believe they will bring much needed improvements to our proxy voting system. I will discuss each in turn.

Final Amendments to the Federal Proxy Rules

The amendments we are considering to the Federal proxy rules will make important changes aimed at fostering transparency and accountability in the proxy voting process. First, the rulemaking will codify the Commission’s previous interpretation that proxy voting advice produced by proxy voting advice businesses generally constitutes a solicitation. [12] This supports the Commission’s long-standing view, and highlights the importance of periodically revisiting our rules to account for changes in our markets.

Second, the rulemaking will require proxy voting advice businesses to provide substantive and consistent disclosure of material conflicts of interest to their clients. [13] The transparency afforded by these amendments should make it easier for such clients who are investment advisers to conduct due diligence and oversight of these voting advice providers and to gauge the objectivity and reliability of their voting advice. [14]

Third, the rulemaking will require proxy voting advice businesses to establish policies and procedures reasonably designed to (1) allow all registrants who are the subject of their voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients, and (2) provide a mechanism for clients to access any response that the registrant provides to the voting advice, in a timely manner before those clients vote. [15]

Finally, the rulemaking will add a new example to Rule 14a-9 to explain that the failure to disclose material information regarding proxy voting advice, “such as the proxy voting advice business’s methodology, sources of information, or conflicts of interest” could, depending on the particular facts and circumstances, be misleading within the meaning of the rule. [16] While this amendment to Rule 14a-9 does not create a new or additional source of liability, I believe it will serve as a helpful addition to our proxy rules in light of these new conditions to the exemptions to solicitation, recognizing the unique information provided by proxy voting advice businesses that could run afoul of our antifraud rule.

Each of these changes bring improvements to the status quo for investors and our markets. Proxy voting advice businesses have long relied on different exemptions to our Federal proxy rules, resulting in a patchwork of practices for disclosing their conflicts of interest. They have also developed very different practices regarding whether or how they engage with registrants or communicate with clients regarding those registrants’ perspectives on voting advice. I believe the amendments we will vote on today will help provide consistent standards for conflict of interest disclosure as well as engagement with registrants. This consistency should improve the information available to investment advisers and other investors when they evaluate voting advice and make voting decisions. In short, this rulemaking should allow for more informed voting.

Guidance for Investment Advisers

That brings me to my discussion of the second recommendation presented today: the supplemental guidance to investment advisers. Last August, the Commission adopted guidance for investment advisers concerning their voting obligations, pursuant to Rule 206(4)-6 of the Investment Advisers Act of 1940 (“Advisers Act”), as well as the Advisers Act fiduciary duty. [17] This guidance reaffirmed that investment advisers must fulfill their fiduciary duty when voting proxies for clients, including when they retain professional voting advice businesses for help, and offered several considerations for this purpose. [18] Fiduciary duty cannot be outsourced.

Today, we offer additional considerations that relate to investment advisers’ use of the automated voting (also called robo-voting) features offered on the electronic platforms of the most heavily used proxy voting advice businesses. [19] These businesses offer features that (1) pre-populate clients’ electronic ballots with the businesses’ voting recommendations, and (2) automatically submit those ballots for counting. [20] With the help of such features, a client could effectively “set-it-and-forget-it,” allowing the proxy voting advice business to produce recommendations that determine the client’s vote, without further action by the client.

The Commission’s proposal to regulate proxy voting advice businesses sought comment on whether the Commission should limit the businesses’ ability to offer these features to their clients, including investment advisers. [21] I appreciate the perspectives that commenters offered on these questions. Some made the case that these features can compound the effect of errors in proxy voting advice and frustrate meaningful engagement with issuers. Others explained that these features, when used with appropriate oversight, can allow asset managers to allocate their resources to the most complex matters up for a vote, make sure to meet their submission deadlines, and save costs for underlying investors. From this feedback, it became clear that these features are widely used amongst investment advisers and integral to many advisers’ voting processes. [22] In fact, multiple advisers told me that they find the services provided on the electronic platforms of proxy voting advice businesses as useful as those businesses’ voting advice itself.

The increasingly prevalent use of automated voting features by investment advisers, which became even more apparent from the responses to our proposing release, has led to discussions and questions about potential concerns and benefits of such use as well as underlying investors’ understanding of the practice. It seems appropriate that we provide guidance for advisers’ consideration in meeting their existing obligations under the Advisers Act and current SEC rules. I have said before that I am skeptical of how heavy reliance on such mechanistic features, in many instances, can be consistent with the duties investment advisers undertake as fiduciaries to their clients. [23] I have also asked whether the operations and effects of automated voting mechanisms are understood by the underlying investors who hire investment advisers to vote on their behalf. [24]

The Commission has previously said that if investment advisers have assumed the authority to vote on behalf of their clients, they have the obligation to exercise that authority in the best interests of their clients, which includes making voting decisions on an informed basis. [25] The guidance before us reminds advisers that this obligation applies, regardless of whether an adviser utilizes automated voting features. This is important. Specifically, the policies and procedures that investment advisers are already required to have with respect to voting securities of their clients [26] should be reasonably designed to allow for consideration of new material information about a matter (if received with enough time to review prior to casting a vote), [27] whether the advisers utilize automated voting features or not. Such new information could include a registrant’s response to proxy voting advice. If the amendments to the proxy solicitation rules before us today are adopted, I suspect registrants will file such responses more often.

Today’s guidance reemphasizes a point that I believe many investment advisers already know: Voting is an important responsibility and if new material information becomes available, they should review and assess it. I hope this reminder will help investment advisers refresh their thinking on how they take advantage of technology available to them and ensure that their practices are calibrated accordingly.

The guidance offers another reminder to advisers who wish to use automated voting features, while fulfilling their fiduciary duties. An investment adviser also has an obligation, as a result of its duty of loyalty to clients, to make full and fair disclosure to its clients of all material facts relating to the advisory relationship. [28] The guidance suggests to advisers that they should consider whether their use of automated voting features is such a material fact, and if it is, whether they are providing sufficiently specific information so that a client is able to understand the role of automated voting in the investment adviser’s exercise of voting authority. [29]

I have said before that I believe that the Commission would do well to pursue examinations of investment advisers’ voting practices, [30] and electronification of voting processes is another aspect of that which is worthy of review. I also appreciate that the Commission staff will continue to consider whether further regulatory action is appropriate with respect to the proxy voting advice businesses that offer automated voting features. [31]

Conclusion

I realize that not everyone will be happy with where these recommendations landed. Some people wanted no changes to the status quo. There will be others who believe this agency should have done much more to regulate proxy voting advice businesses.

But, today’s actions are consistent with our agency’s mission—protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets—as well as the parameters that mission sets on our policy endeavors. In these actions, we have identified an area where our markets have outgrown existing regulation on solicitation, resulting in concerns for investor protection and capital formation. We have set forth a tailored approach for updating our Federal proxy rules in a way that minimizes disruption to current operations of significant market participants and reaffirms existing duties.

These amendments will result in investment advisers and institutional investors receiving proxy voting advice that is more transparent, accurate, and materially complete. This will build confidence in our markets as investors will be more informed when voting public company shares. Most importantly, the ultimate retail investors—the Main Street clients and beneficiaries of investment advisers and institutional investors—can rest assured that the SEC is helping to ensure those managing their money and voting proxies on their behalf are doing so in a manner consistent with their fiduciary duty. I consider these recommendations to be a “win” for our markets and investors, and I am happy to vote “yes” on both of them.

Endnotes

1See, e.g., Commissioner Elad L. Roisman, “Statement at Proxy Process Roundtable” (Nov. 15, 2018), https://www.sec.gov/news/public-statement/statement-roisman-111518; Commissioner Elad L. Roisman, “Keynote Remarks: ICI Mutual Funds and Investment Management Conference” (Mar. 18, 2019), https://www.sec.gov/news/speech/speech-roisman-031819#_ftn31.(go back)

2See, e.g., “Proxy Process and Rules: Examining Current Practices and Potential Changes,” Hearing Before the Senate Committee on Banking, Housing, and Urban Affairs (Dec. 6, 2018); The Corporate Governance Fairness Act, S. 3614, 115th Cong. (2017–18); Corporate Governance Reform and Transparency Act of 2017, H.R.4015, 115th Cong. (2017–18); “Examining the Market Power and Impact of Proxy Advisory Firms,” Hearing Before the House Financial Services Committee, Subcommittee on Capital Markets and Government Sponsored Enterprises (June 5, 2013); see generally GAO Report to Congress, Corporate Shareholder Meetings—Proxy Advisory Firms’ Role in Voting and Corporate Governance Practices (Nov. 2016) (“2016 GAO Report”); GAO Report to Congress, Corporate Shareholder Meetings—Issues Relating to Firms that Advise Institutional Investors on Proxy Voting (June 2007) (“2007 GAO Report”).(go back)

3See As of 2019, ISS reported that it had approximately 2,000 institutional clients. The ISS Advantage, Institutional Shareholder Services, available at https://www.issgovernance.com/about/about-iss/. Glass Lewis reported that, as of 2019, it had “1,300+ clients, including the majority of the world’s largest pension plans, mutual funds and asset managers, who collectively manage more than $35 trillion in assets.” Company Overview, Glass Lewis, available at https://www.glasslewis.com/company-overview/.(go back)

4See, e.g., Roundtable on the Proxy Process (Nov. 15, 2018), comments available at https://www.sec.gov/proxy-roundtable-2018; Proxy Voting Roundtable (Feb. 19, 2015), comments available at https://www.sec.gov/comments/4-681/4-681.shtml; Roundtable on Proxy Advisory Services (Dec. 5, 2013), comments available at https://www.sec.gov/spotlight/proxy-advisory-services.shtml; Concept Release on the U.S. Proxy System, Release No. 34-62495 (Jul. 14, 2010), comments available at https://www.sec.gov/comments/s7-14-10/s71410.shtml; Roundtable Discussions Regarding Proxy Process (May 24, 2007), https://www.sec.gov/spotlight/proxyprocess.htm. See also Concept Release on the U.S. Proxy System, Release No. 34-62495 (Jul. 14, 2010). Examples of Congressional hearings relating to this topic are included in note 2 supra.(go back)

5See note 2 supra.(go back)

6Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Release No. 34-87457 (Nov. 5, 2019) (“Voting Advice Proposal”), https://www.sec.gov/rules/proposed/2019/34-87457.pdf.(go back)

7See Comments on the Proposing Release, https://www.sec.gov/comments/s7-22-19/s72219.htm.(go back)

8See, e.g., Letter from Council of Inst. Investors (Nov. 14, 2019) (“It is not clear whether the PA Proposal creates the potential for insider trading on certain market-moving recommendations and related analysis, particularly in connection with mergers and acquisitions (M&A), and how the SEC staff thought about such a risk in proposing the five-day review and ‘final notice’ periods.”).(go back)

9See Commissioner Elad L. Roisman, “Statement at the Open Meeting: Modernizing SEC Rules Governing Proxy Voting Advice,” (Nov. 5, 2019), https://www.sec.gov/news/public-statement/statement-roisman-2019-11-05-14a-2b#_ftnref8.(go back)

10Division of Investment Management, “Statement Regarding Staff Proxy Advisory Letters” (Sept. 13, 2018), https://www.sec.gov/news/public-statement/statement-regarding-staff-proxy-advisory-letters.(go back)

11Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-[ ] (Jul. 22, 2020) (“Supplemental Adviser Voting Guidance”).(go back)

12See Exemptions from the Proxy Rules for Proxy Voting Advice, Release No. 34-[____] (Jul. 22, 2020) (“Amendments to Proxy Solicitation Rules”).(go back)

13Id.(go back)

14For a discussion of investment advisers’ obligations with respect to oversight of voting advice providers, see Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019) (“Commission Guidance on Proxy Voting Responsibilities”), https://www.sec.gov/rules/interp/2019/ia-5325.pdf, at 18–19.(go back)

15See Amendments to Proxy Solicitation Rules.(go back)

16Id.(go back)

17See Commission Guidance on Proxy Voting Responsibilities . While the amendments being considered today under Rule 14a-2(b) use the term “proxy voting advice business,” and I use this term throughout this statement, the Commission Guidance on Proxy Voting Responsibilities and the Supplemental Adviser Voting Guidance use the term “proxy advisory firm.” See also Rule 206(4)-6 of the Advisers Act; “Commission Interpretation Regarding Standard of Conduct for Investment Advisers,” Release No. IA-5248 (June 5, 2019) (the “Fiduciary Interpretation”), https://www.sec.gov/rules/interp/2019/ia-5248.pdf.(go back)

18Commission Guidance on Proxy Voting Responsibilities, at 6.(go back)

19See Supplemental Adviser Voting Guidance.(go back)

20See Voting Advice Proposal, at 9.(go back)

21See Id. at 66 and 116.(go back)

22See Letter from Karen L. Barr, President and CEO, Investment Adviser Association (Feb. 3, 2020), https://www.sec.gov/comments/s7-22-19/s72219-6742881-207804.pdf (“Disabling the voting submission process used by proxy advisory firms would significantly burden and potentially disrupt the voting process.”)(go back)

23Commissioner Elad L. Roisman, “Speech at the Council of Institutional Investors’ Conference” (Mar. 10, 2020), https://www.sec.gov/news/speech/speech-roisman-cii-2020-03-10#_ftn10.(go back)

24Id.(go back)

25Commission Guidance on Proxy Voting Responsibilities, at 4 (“[F]or an investment adviser to form a reasonable belief that its voting determinations are in the best interest of the client, it should conduct an investigation reasonably designed to ensure that the voting determination is not based on materially inaccurate or incomplete information.”)(go back)

26Rule 206(4)-6.(go back)

27Commission Guidance on Proxy Voting Responsibilities, at 16.(go back)

28See the Fiduciary Interpretation, at 21 (“To meet its duty of loyalty, an adviser must make full and fair disclosure to its clients of all material facts relating to the advisory relationship.”)(go back)

29Supplemental Adviser Voting Guidance, at 6. Rule 206(4)-6(c) requires investment advisers to describe their voting policies and procedures to clients. See also Form ADV, Part 2A, Item 17 (requiring an adviser to briefly describe voting policies and procedures where it has, or will accept, authority to vote client securities).(go back)

30See Speech at the Council of Institutional Investors’ Conference, note 23 supra.(go back)

31See Amendments to Proxy Solicitation Rules (“We have declined to adopt such a prescriptive approach at this time, but rather have focused on an incremental principles-based approach in order to see how practice develops in light of the changes being adopted. The amendments we are adopting are intended to make clients of proxy voting advice businesses aware of a registrant’s views about proxy voting advice in a timely manner, which could assist these clients in making voting determinations. Further, the Commission has provided investment advisers, who often engage proxy voting advice businesses to provide voting related services, with additional guidance regarding how they could consider their policies and procedures regarding these types of automated voting functions.”).(go back)