Gary Gensler, the new chairman of the U.S. Securities and Exchange Commission, released a statement on June 1, 2021, directing SEC staff to consider revisiting its interpretation and guidance from September 2019 regarding the application of the proxy rules to proxy advisors (the 2019 Guidance), and the amendments that it adopted in July 2020 that modified Rules 14a-1(l), 14a-2(b) and 14a-9 under the Securities Exchange Act of 1934 (the 2020 Amendments).
The 2019 Guidance and the 2020 Amendments were further discussed in our prior alert, “SEC Tightens Regulations on Proxy Advisory Firms.” They defined voting recommendations and related materials provided by proxy advisory firms, such as Institutional Shareholder Services (ISS), as “solicitations” subject to antifraud rules and imposed conditions that must be met in order for proxy advisory firms to rely on the exemptions from filing full proxy solicitation materials that had been historically available to them. These new conditions included disclosure of conflicts of interest, providing companies with the opportunity to respond to voting recommendations at or prior to the time such recommendations are released, and providing access to responses by the subject company to the advisory firms’ recommendations. The amendments also specified the circumstances that would cause proxy advice to be “misleading” within the meaning of anti-fraud Rule 14a-9.
The 2020 Amendments became effective on November 2, 2020, but mandatory compliance was deferred until December 1, 2021.
The leading U.S. proxy advisory firms, ISS and Glass Lewis, as well as a number of institutional investors, strongly resisted the 2019 Guidance and 2020 Amendments. ISS has gone so far as to sue the SEC over its attempt to regulate the proxy advisory business in the manner of the 2019 Guidance and 2020 Amendments. On the other hand, the 2019 Guidance and the 2020 Amendments were generally welcomed by reporting companies for providing them with greater ability to respond to negative voting recommendations or commentary from the proxy advisory firms and for increasing regulatory oversight of the proxy advisory business.
In response to Chairman Gensler’s directive, the Division of Corporation Finance issued a public statement that it would consider recommending that the SEC revisit the 2019 Guidance and the 2020 Amendments. Notably, the Division of Corporation Finance also stated that it would not recommend enforcement action based on the 2019 Guidance or the 2020 Amendments while the SEC considers further regulatory action. In addition, the Division confirmed that, in the event that the 2020 Amendments remain in place with the current December 1, 2021 compliance date, the staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by ISS of its litigation challenging the 2020 Amendments and the 2019 Guidance.
It is uncertain how or when the SEC will move forward to review and perhaps revise the 2019 Guidance and 2020 Amendments, although it appears that a majority of SEC members do not support them. In the interim, for however long that interim period may be, the Division of Corporation Finance’s refusal to seek to enforce the 2019 Guidance, and 2020 Amendments once they become applicable, would seem to be tantamount to their suspension or repeal.