Rule2022-15311
Proxy Voting Advice
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 19, 2022
Effective
September 19, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
We are adopting amendments to the Federal proxy rules governing proxy voting advice as part of our reassessment of those rules and in light of feedback from market participants on those rules, certain developments in the market for proxy voting advice, and comments received regarding the proposed amendments. The amendments remove a condition to the availability of certain exemptions from the information and filing requirements of the Federal proxy rules for proxy voting advice businesses. The release also rescinds certain guidance that the Commission issued to investment advisers about their proxy voting obligations. In addition, the amendments remove a note that provides examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the Federal proxy rules' prohibition on material misstatements or omissions. Finally, the release discusses our views regarding the application of that prohibition to proxy voting advice, in particular with respect to statements of opinion.
Full Text
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<title>Federal Register, Volume 87 Issue 137 (Tuesday, July 19, 2022)</title>
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[Federal Register Volume 87, Number 137 (Tuesday, July 19, 2022)]
[Rules and Regulations]
[Pages 43168-43197]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-15311]
[[Page 43167]]
Vol. 87
Tuesday,
No. 137
July 19, 2022
Part III
Securities and Exchange Commission
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17 CFR Parts 240 and 276
Proxy Voting Advice; Final Rule
Federal Register / Vol. 87 , No. 137 / Tuesday, July 19, 2022 / Rules
and Regulations
[[Page 43168]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 276
[Release Nos. 34-95266; IA-6068; File No. S7-17-21]
RIN 3235-AM92
Proxy Voting Advice
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: We are adopting amendments to the Federal proxy rules
governing proxy voting advice as part of our reassessment of those
rules and in light of feedback from market participants on those rules,
certain developments in the market for proxy voting advice, and
comments received regarding the proposed amendments. The amendments
remove a condition to the availability of certain exemptions from the
information and filing requirements of the Federal proxy rules for
proxy voting advice businesses. The release also rescinds certain
guidance that the Commission issued to investment advisers about their
proxy voting obligations. In addition, the amendments remove a note
that provides examples of situations in which the failure to disclose
certain information in proxy voting advice may be considered misleading
within the meaning of the Federal proxy rules' prohibition on material
misstatements or omissions. Finally, the release discusses our views
regarding the application of that prohibition to proxy voting advice,
in particular with respect to statements of opinion.
DATES: The amendments and the rescission of the guidance are effective
September 19, 2022.
FOR FURTHER INFORMATION CONTACT: Valian Afshar, Special Counsel, Office
of Mergers and Acquisitions, Division of Corporation Finance, at (202)
551-3440, regarding the amendments, and Thankam A. Varghese, Senior
Counsel, Chief Counsel's Office, Division of Investment Management, at
(202) 551-6825, regarding the rescission of the guidance, U.S.
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549.
SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR
240.14a-2 (``Rule 14a-2'') and 17 CFR 240.14a-9 (``Rule 14a-9'') under
the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] (``Exchange
Act'').\1\
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\1\ Unless otherwise noted, when we refer to the Exchange Act,
or any paragraph of the Exchange Act, we are referring to 15 U.S.C.
78a of the United States Code, at which the Exchange Act is
codified, and when we refer to rules under the Exchange Act, or any
paragraph of these rules, we are referring to title 17, part 240 of
the Code of Federal Regulations [17 CFR 240], in which these rules
are published.
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Table of Contents
I. Introduction
II. Discussion of Final Amendments
A. Amendments to Rule 14A-2(B)(9)
1. Proposed Amendments
2. Comments Received
3. Final Amendments
4. 2020 Supplemental Proxy Voting Guidance
B. Amendment to Rule 14A-9
1. Proposed Amendment
2. Comments Received
3. Final Amendment
III. Other Matters
IV. Economic Analysis
A. Economic Baseline
1. Affected Parties and Current Market Practices
2. Current Regulatory Framework
B. Benefits and Costs
1. Benefits
2. Costs
C. Effects on Efficiency, Competition, and Capital Formation
D. Reasonable Alternatives
1. Interpretive Guidance Regarding Whether Systems and Processes
Satisfy the Rule 14a-2(b)(9)(ii) Conditions
2. Exempting Certain Portions of PVABs' Proxy Voting Advice From
Rule 14a-9 Liability
V. Paperwork Reduction Act
A. Background
B. Summary of Comment Letters on PRA Estimates
C. Burden and Cost Estimates for the Final Amendments
1. Impact on Affected Parties
2. Aggregate Decrease in Burden
3. Decrease in Annual Responses
4. Incremental Change in Compliance Burden for Collection of
Information
5. Program Change and Revised Burden Estimates
VI. Final Regulatory Flexibility Analysis
A. Need for, and Objectives of, the Final Amendments
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Agency Action To Minimize Effect on Small Entities
Statutory Authority
I. Introduction
In 2020, the Securities and Exchange Commission (the
``Commission'') adopted final rules regarding proxy voting advice (the
``2020 Final Rules'') provided by proxy advisory firms, or proxy voting
advice businesses (``PVABs'').\2\ The 2020 Final Rules, among other
things, did the following:
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\2\ See Exemptions from the Proxy Rules for Proxy Voting Advice,
Release No. 34-89372 (July 22, 2020) [85 FR 55082 (Sept. 3, 2020)]
(``2020 Adopting Release''). For purposes of this release, we refer
to persons who furnish proxy voting advice covered by 17 CFR
240.14a-1(l)(1)(iii)(A) (``Rule 14a-1(l)(1)(iii)(A)'') as ``proxy
voting advice businesses,'' which we abbreviate as ``PVABs.'' See 17
CFR 240.14a-1(l)(1)(iii)(A). Rule 14a-1(l)(1)(iii)(A) provides that
the terms ``solicit'' and ``solicitation'' include any proxy voting
advice that makes a recommendation to a security holder as to its
vote, consent, or authorization on a specific matter for which
security holder approval is solicited, and that is furnished by a
person that markets its expertise as a provider of such proxy voting
advice, separately from other forms of investment advice, and sells
such proxy voting advice for a fee. Id.
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<bullet> Amended 17 CFR 240.14a-1(l) (``Rule 14a-1(l)'') to codify
the Commission's interpretation that proxy voting advice generally
constitutes a ``solicitation'' subject to the proxy rules.
<bullet> Adopted 17 CFR 240.14a-2(b)(9) (``Rule 14a-2(b)(9)'') to
add new conditions to two exemptions (set forth in 17 CFR 240.14a-
2(b)(1) and (3) (``Rules 14a-2(b)(1) and (3)'')) that PVABs generally
rely on to avoid the proxy rules' information and filing requirements.
Those conditions include:
[cir] New conflicts of interest disclosure requirements in 17 CFR
240.14a-2(b)(9)(i) (``Rule 14a-2(b)(9)(i)''); and
[cir] A requirement in 17 CFR 240.14a-2(b)(9)(ii) (``Rule 14a-
2(b)(9)(ii)'') that a PVAB adopt and publicly disclose written policies
and procedures reasonably designed to ensure that (A) registrants that
are the subject of proxy voting advice have such advice made available
to them at or prior to the time such advice is disseminated to the
PVAB's clients and (B) the PVAB provides its clients with a mechanism
by which they can reasonably be expected to become aware of any written
statements regarding its proxy voting advice by registrants that are
the subject of such advice, in a timely manner before the security
holder meeting (the ``Rule 14a-2(b)(9)(ii) conditions'').
<bullet> Adopted Note (e) to Rule 14a-9, which prohibits false or
misleading statements, to include examples of material misstatements or
omissions related to proxy voting advice. Specifically, Note (e) to
Rule 14a-9 provides that the failure to disclose material information
regarding proxy voting advice, ``such as the [PVAB's] methodology,
sources of information, or conflicts of interest,'' may, depending upon
particular facts and circumstances, be misleading within the meaning of
the rule.\3\
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\3\ 17 CFR 240.14a-9, note (e).
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The amendments to Rules 14a-1(l) and 14a-9 became effective on
November 2, 2020. The conditions set
[[Page 43169]]
forth in new Rule 14a-2(b)(9) became effective on December 1, 2021.\4\
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\4\ Id. at 55122. Institutional Shareholder Services, Inc. has
filed a lawsuit challenging the 2020 Final Rules. See Institutional
Shareholder Services, Inc. v. SEC, No. 1:19-cv-3275-APM (D.D.C.). In
addition, on Oct. 13, 2021, the National Association of
Manufacturers and Natural Gas Services Group, Inc. filed a lawsuit
arising out of a statement issued by the Division of Corporation
Finance on June 1, 2021 regarding the 2020 Final Rules. See National
Association of Manufacturers et al. v. SEC, No. 7:21-cv-183 (W.D.
Tex.); see also infra note 18 (discussing the Division of
Corporation Finance's June 1, 2021 statement).
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The 2020 Final Rules were intended to help ensure that investors
who use proxy voting advice receive more transparent, accurate, and
complete information on which to make their voting decisions.\5\ In the
adopting release for the 2020 Final Rules (the ``2020 Adopting
Release''), the Commission recognized the ``important and prominent
role'' that PVABs play in the proxy voting process \6\ and adopted the
2020 Final Rules, in part, to address certain concerns that
``registrants, investors, and others have expressed . . . about the
role of [PVABs].'' \7\ At the same time, the Commission endeavored to
tailor the 2020 Final Rules to avoid imposing undue costs or delays
that could adversely affect the timely provision of independent proxy
voting advice.\8\
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\5\ 2020 Adopting Release at 55082.
\6\ Id. at 55083 (noting that institutional investors and
investment advisers generally retain PVABs to ``assist them in
making voting determinations on behalf of their own clients'' as
well as ``other aspects of the voting process, which for certain
investment advisers has become increasingly complex and demanding
over time'').
\7\ Id. at 55085.
\8\ Id. at 55082, 55112.
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After the Commission adopted the 2020 Final Rules, however,
institutional investors and other PVAB clients continued to express
strong concerns about the rules' impact on their ability to receive
independent proxy voting advice in a timely manner. Furthermore, PVABs
continued to develop industry-wide best practices and improve their own
business practices to address the concerns that were the impetus for
the 2020 Final Rules. The Commission subsequently determined that it
was appropriate to reassess the 2020 Final Rules, solicit further
public comment, and, where appropriate, recalibrate the rules to
preserve the independence of proxy voting advice and ensure that PVABs
can deliver advice in a timely manner without passing on higher costs
to their clients. As such, in November 2021, the Commission proposed
the following changes to the rules governing proxy voting advice (the
``2021 Proposed Amendments''):
<bullet> Amend Rule 14a-2(b)(9) to remove the Rule 14a-2(b)(9)(ii)
conditions and paragraphs (iii), (iv), (v), and (vi) of Rule 14a-
2(b)(9), which contain safe harbors and exclusions from the Rule 14a-
2(b)(9)(ii) conditions; and
<bullet> Amend Rule 14a-9 to remove Note (e) to that rule.\9\
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\9\ See Proxy Voting Advice, Release No. 34-93595 (Nov. 17,
2021) [86 FR 67383 (Nov. 26, 2021)] (``2021 Proposing Release'').
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The 2021 Proposed Amendments would not affect other aspects of the
2020 Final Rules, which would remain in place and effective as to PVABs
and their advice.\10\ As such, under the 2021 Proposed Amendments,
proxy voting advice would remain a solicitation subject to the proxy
rules.\11\ Additionally, in order to rely on the exemptions from the
proxy rules' information and filing requirements set forth in Rules
14a-2(b)(1) and (3), PVABs would continue to be subject to Rule 14a-
2(b)(9)'s conflicts of interest disclosure requirement.\12\ Finally,
although the 2021 Proposed Amendments would remove Note (e) to Rule
14a-9, material misstatements of fact in, and omissions of material
fact from, proxy voting advice would remain subject to liability under
that rule.\13\ The proposing release for the 2021 Proposed Amendments
(the ``2021 Proposing Release'') also requested comment as to whether
the Commission should rescind or revise the supplemental guidance that
it issued to investment advisers in 2020 about their proxy voting
obligations (the ``Supplemental Proxy Voting Guidance'') \14\ because
it was prompted, in part, by the adoption of the Rule 14a-2(b)(9)(ii)
conditions.\15\ Finally, the 2021 Proposing Release provided a
discussion of the application of Rule 14a-9 to proxy voting advice,
specifically with respect to a PVAB's statements of opinion.\16\
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\10\ Id. at 67384.
\11\ Id.
\12\ Id.
\13\ Id.
\14\ Supplement to Commission Guidance Regarding Proxy Voting
Responsibilities of Investment Advisers, Release No. IA-5547 (July
22, 2020) [85 FR 55155 (Sept. 3, 2020)].
\15\ 2021 Proposing Release at 67388-89.
\16\ Id. at 67390.
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We received a number of comments in response to the 2021 Proposed
Amendments.\17\ After considering the public comments, we are adopting
the 2021 Proposed Amendments, as proposed, for the reasons set forth
below. Consistent with the proposal, we are amending Rules 14a-2 and
14a-9 to rescind the Rule 14a-2(b)(9)(ii) conditions (as well as the
related safe harbors and exclusions set forth in Rules 14a-2(b)(9)(iii)
through (vi)) and delete Note (e) to Rule 14a-9. In addition, we are
rescinding the Supplemental Proxy Voting Guidance. Finally, in Section
II.B.3 below, we reiterate our discussion regarding the application of
Rule 14a-9 to proxy voting advice, specifically with respect to a
PVAB's statements of opinion.\18\
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\17\ See generally letters submitted in connection with the 2021
Proposed Amendments, available at <a href="https://www.sec.gov/comments/s7-17-21/s71721.htm">https://www.sec.gov/comments/s7-17-21/s71721.htm</a>. Unless otherwise specified, all references in this
release to comment letters are to comments submitted on the 2021
Proposed Amendments.
\18\ On June 1, 2021, the Division of Corporation Finance issued
a statement that it would not recommend enforcement action based on
the 2020 Final Rules (or on a related 2019 interpretive release
discussed further infra note 165 and accompanying text) during the
period in which the Commission was considering further regulatory
action in this area. Division of Corporation Finance, Statement on
Compliance with the Commission's 2019 Interpretation and Guidance
Regarding the Applicability of the Proxy Rules to Proxy Voting
Advice and Amended Rules 14a-1(1), 14a-2(b), 14a-9, U.S. Securities
and Exchange Commission, available at <a href="https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01">https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01</a>. As the Commission
noted in the 2021 Proposing Release, this staff statement did not
alter PVABs' obligation to comply with the Rule 14a-2(b)(9)
conditions by Dec. 1, 2021. See 2021 Proposing Release at 67393,
n.120; see also infra note 278. In light of today's action, we
hereby rescind the staff's statement.
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These final amendments reflect the fact that our thinking has
evolved with respect to the Rule 14a-2(b)(9)(ii) conditions and Note
(e) to Rule 14a-9, informed, in part, by the concerns expressed by
PVABs' clients and other investors that were among the primary intended
beneficiaries of the 2020 Final Rules. The Rule 14a-2(b)(9)(ii)
conditions and Note (e) reflected an effort to balance competing policy
concerns. As initially proposed, Rule 14a-2(b)(9) would have required
that PVABs allow registrants multiple opportunities to review proxy
voting advice and provide feedback on such advice in advance of its
distribution to PVABs' clients. In declining to adopt those proposed
advance review and feedback provisions in the 2020 Final Rules, the
Commission recognized the significant concerns raised by investors and
other commenters that the proposed rules would have adverse effects on
the cost, timeliness, and independence of proxy voting advice.\19\ The
Commission responded to those concerns by instead adopting the
modified, more principles-based conditions in Rule 14a-2(b)(9)(ii) and
the related safe harbors.\20\
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\19\ 2020 Adopting Release at 55107-08.
\20\ Id.
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The Commission reasonably determined at the time it adopted the
2020 Final Rules that the revised Rule 14a-2(b)(9)(ii) conditions
struck an appropriate balance between the risks
[[Page 43170]]
raised by commenters and the Commission's interest in facilitating more
informed proxy voting decisions. We have revisited our analysis of
those issues, however, and are now striking a different and improved
policy balance. We believe this new policy balance better alleviates
the costs and risks to PVABs, as compared to the 2020 Final Rules, and
better addresses PVAB clients' and other investors' concerns about
receiving timely and independent advice from PVABs. In particular, we
are no longer persuaded that the potential benefits of those conditions
sufficiently justify the risks they pose to the cost, timeliness, and
independence of proxy voting advice and believe that the final
amendments strike a better policy balance. Several factors support the
reasonableness of our analysis. For example, it is supported by the
continued, strong opposition to the Rule 14a-2(b)(9)(ii) conditions
from many institutional investors and other PVAB clients, as well as
many of the commenters on the 2021 Proposed Amendments, who have
continued to raise concerns that the 2020 Final Rules would have
adverse effects on the cost, timeliness, and independence of proxy
voting advice. Our analysis is also supported by certain voluntary
practices of PVABs. We believe those practices are likely, at least to
some extent, to advance the goals underlying the Rule 14a-2(b)(9)(ii)
conditions, thereby providing institutional investors and other PVAB
clients with some of the benefits that those conditions were expected
to produce while avoiding the potentially significant associated costs.
The Commission also determined at the time it adopted the 2020
Final Rules that the addition of Note (e) to Rule 14a-9 would clarify
the application of the rule to proxy voting advice while balancing
concerns regarding heightened legal uncertainty and litigation risk for
PVABs. We now conclude, however, that rather than reducing legal
uncertainty and confusion, the addition of Note (e) has unnecessarily
exacerbated it by creating a risk of confusion regarding the
application of Rule 14a-9 to proxy voting advice.\21\
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\21\ See infra Section II.B.3.
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We emphasize that the final amendments do not represent a wholesale
reversal of the 2020 Final Rules. Proxy voting advice generally remains
a solicitation subject to the proxy rules, including liability under
Rule 14a-9 for material misstatements or omissions of fact. Further, in
order to rely on the exemptions from the proxy rules' information and
filing requirements set forth in Rules 14a-2(b)(1) and (3), PVABs will
still have to satisfy Rule 14a-2(b)(9)'s conflicts of interest
disclosure requirements. As we explain in greater detail in Section
II.B.3 below, our deletion of Note (e) does not affect the scope of
Rule 14a-9 or its application to proxy voting advice. As with any other
person engaged in a solicitation as defined in Rule 14a-1(l), a PVAB
may be liable under Rule 14a-9 for a material misstatement of fact, or
an omission of material fact, including, depending on the facts and
circumstances, with regard to its methodology, sources of information,
or conflicts of interest.
The intent of the final amendments is to avoid burdens on PVABs
that may impede and impair the timeliness and independence of their
proxy voting advice and avoid misperceptions \22\ regarding the
application of Rule 14a-9 liability to proxy voting advice, while also
preserving investors' confidence in the integrity of such advice. We
believe that the final amendments, in combination with the unaffected
portions of the 2020 Final Rules, strike a more appropriate balance
than the 2020 Final Rules, as originally adopted, because they will
address PVAB clients' and other investors' concerns about potential
impediments to the timely provision of independent proxy voting advice.
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\22\ We discuss these misperceptions in more detail in Section
II.B.3 below. See infra notes 221-222 and accompanying text.
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II. Discussion of Final Amendments
A. Amendments to Rule 14a-2(b)(9)
The 2020 Final Rules amended Rule 14a-2(b) by adding paragraph
(9),\23\ which sets forth conditions that a PVAB must satisfy in order
to rely on the exemptions in Rules 14a-2(b)(1) and (b)(3) from the
proxy rules' information and filing requirements.\24\ Rule 14a-
2(b)(9)(i) requires PVABs to provide their clients with certain
conflicts of interest disclosures in connection with their proxy voting
advice.\25\ The Rule 14a-2(b)(9)(ii) conditions require that PVABs
adopt and publicly disclose written policies and procedures reasonably
designed to ensure that (A) registrants that are the subject of their
proxy voting advice have such advice made available to them at or prior
to the time when such advice is disseminated to the PVABs' clients and
(B) the PVABs provide their clients with a mechanism by which they can
reasonably be expected to become aware of any written statements
regarding their proxy voting advice by registrants who are the subject
of such advice, in a timely manner before the relevant shareholder
meeting (or, if no meeting, before the votes, consents or
authorizations may be used to effect the proposed action).\26\
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\23\ 17 CFR 240.14a-2(b)(9).
\24\ PVABs have typically relied upon the exemptions in Rules
14a-2(b)(1) and (b)(3) to provide advice without complying with the
proxy rules' information and filing requirements. Amendments to
Exemptions from the Proxy Rules for Proxy Voting Advice, Release No.
34-87457 (Nov. 5, 2019) [84 FR 66518, 66525 & n.68 (Dec. 4, 2019)]
(``2019 Proposing Release'').
\25\ 17 CFR 240.14a-2(b)(9)(i).
\26\ 17 CFR 240.14a-2(b)(9)(ii). The Commission adopted the Rule
14a-2(b)(9)(ii) conditions, in part, in response to the concerns
expressed by commenters about the ``advance review and feedback''
conditions that were included in the Commission's 2019 proposed
rules (the ``2019 Proposed Rules''). Under the advance review and
feedback conditions in the 2019 Proposed Rules, a PVAB would have
been required to, as a condition to relying on the exemptions in
Rules 14a-2(b)(1) and (3), provide registrants and certain other
soliciting persons covered by its proxy voting advice a limited
amount of time to review and provide feedback on the advice before
it is disseminated to the PVAB's clients, with the length of time
provided depending on how far in advance of the shareholder meeting
the registrant or other soliciting person has filed its definitive
proxy statement. See 2019 Proposing Release at 66530-35. These
conditions were among the most contentious features of the 2019
Proposed Rules and drew a significant number of opposing public
comments. 2020 Adopting Release at 55103-07. In response to these
comments, the Commission reconsidered its approach and, in the 2020
Final Rules, adopted the Rule 14a-2(b)(9)(ii) conditions in place of
the advance review and feedback conditions. Id. at 55107-08.
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In addition to those conditions, Rule 14a-2(b)(9) also sets forth
two non-exclusive safe harbor provisions in paragraphs (iii) and (iv)
that, if met, are intended to give assurance to PVABs that they have
satisfied the conditions of Rules 14a-2(b)(9)(ii)(A) and (B),
respectively.\27\ Further, Rules 14a-2(b)(9)(v) and (vi) contain
exclusions from the Rule 14a-2(b)(9)(ii) conditions.\28\ Those rules
provide that PVABs need not comply with Rule 14a-2(b)(9)(ii) to the
extent that their proxy voting advice is based on a client's custom
voting policy or if they provide proxy voting advice as to non-exempt
solicitations regarding certain mergers and acquisitions or contested
matters.\29\
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\27\ 17 CFR 240.14a-2(b)(9)(iii) and (iv).
\28\ 17 CFR 240.14a-2(b)(9)(v) and (vi).
\29\ Id.
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The Commission adopted Rule 14a-2(b)(9)(ii)(A) to help ensure that
registrants are timely informed of proxy voting advice that bears on
the solicitation of their shareholders.\30\ The Commission stated in
the 2020 Adopting Release that the rule was intended as a means to
``further the goal of ensuring that [PVABs'] clients have more
complete, accurate, and transparent information to consider
[[Page 43171]]
when making their voting decisions'' by facilitating opportunities for
registrants to review and respond to proxy voting advice.\31\
Similarly, the Commission adopted Rule 14a-2(b)(9)(ii)(B) as a means of
providing PVABs' clients with additional information that would assist
them in assessing and contextualizing proxy voting advice.\32\ The
Commission intended that this condition would supplement existing
mechanisms--including registrants' ability to file supplemental proxy
materials to respond to proxy voting advice that they may know about
and to alert investors to any disagreements with such advice--so as to
permit PVABs' clients, including investment advisers voting shares on
behalf of their own clients, to consider registrants' views along with
the proxy voting advice and before making their voting
determinations.\33\ This condition reflected the Commission's views
that PVABs' clients would benefit from more information when
considering how to vote their proxies and that shareholders should have
ready access to information to make informed voting decisions.\34\
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\30\ 2020 Adopting Release at 55109.
\31\ Id.
\32\ Id. at 55112-13.
\33\ Id.
\34\ Id. at 55113.
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1. Proposed Amendments
In the 2021 Proposing Release, the Commission proposed to amend
Rule 14a-2(b)(9) by rescinding the Rule 14a-2(b)(9)(ii) conditions. The
Commission noted that investors and others continued to express
significant concerns that the Rule 14a-2(b)(9)(ii) conditions would
increase PVABs' compliance costs and impair the independence and
timeliness of their proxy voting advice and that such effects are not
justified by corresponding investor protection benefits.\35\ Further,
the Commission described PVABs' efforts to develop industry-wide best
practices, in addition to certain of their existing business practices,
and noted that those practices could address the concerns underlying
the Rule 14a-2(b)(9)(ii) conditions. The Commission also observed that,
although these practices differ from the Rule 14a-2(b)(9)(ii)
conditions, they could provide PVABs' clients and registrants with some
of the opportunities and access to information that would have been
required pursuant to the Rule 14a-2(b)(9)(ii) conditions.\36\
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\35\ 2021 Proposing Release at 67385-86.
\36\ Id. at 67387.
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The Commission also proposed to delete paragraphs (iii), (iv), (v),
and (vi) of Rule 14a-2(b)(9), which contain safe harbors and exclusions
from the Rule 14a-2(b)(9)(ii) conditions.\37\ Because the other
paragraphs of Rule 14a-2(b)(9) would all be deleted, the Commission
proposed to redesignate the conflicts of interest disclosure condition
set forth in Rule 14a-2(b)(9)(i) as Rule 14a-2(b)(9).\38\ The
Commission stated that the substance of that condition would otherwise
remain unchanged.\39\
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\37\ Id.
\38\ Id. at 67387, n.55.
\39\ Id.
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2. Comments Received
Commenters expressed a range of views on the proposed amendments to
Rule 14a-2(b)(9). A number of commenters supported rescinding the Rule
14a-2(b)(9)(ii) conditions and deleting paragraphs (iii) through (vi)
of Rule 14a-2(b)(9).\40\ Those supporting commenters included some
institutional investors \41\ and some organizations that represent
institutional investors and investment advisers,\42\ among others.
Several commenters reiterated the concerns regarding the 2020 Final
Rules that prompted the Commission to issue the 2021 Proposed
Amendments, including expressing concern that the Rule 14a-2(b)(9)(ii)
conditions would impair the independence of proxy voting advice,\43\
impede the timeliness of proxy voting advice,\44\ and increase PVABs'
compliance costs.\45\ For example, one commenter asserted that the Rule
14a-2(b)(9)(ii) conditions ``threaten[ ] the independence of the proxy
advisory process by requiring that their voting advice be made
available to corporate management at or prior to the time the advice is
sent to their clients.'' \46\ Another commenter stated that those
conditions ``disrupt[ ] the preparation and delivery of proxy voting
advice to fund managers and increases compliance costs,'' noting that
PVABs ``may engage with hundreds of issuers regarding thousands of
shareholder proposals during a critical shareholder season'' and that
``additional compliance burdens not only muddle the timely delivery of
materials to fund managers making it difficult to use the advice in
advance of a shareholder meeting, but also increase compliance costs
which get passed on to clients.'' \47\
---------------------------------------------------------------------------
\40\ See letters from Fran Seegull, President, U.S. Impact
Investing Alliance (Dec. 17, 2021) (``Alliance''); Anonymous (Nov.
20, 2021) (``Anonymous 1''); Ben J., Administrative Services Manager
(Dec. 7, 2021) (``Ben J.''); Stephen Hall, Legal Director and
Securities Specialist, and Jason Grimes Senior Counsel, Better
Markets, Inc. (Dec. 27, 2021) (``Better Markets''); Marcie Frost,
Chief Executive Officer, California Public Employees' Retirement
System (Dec. 27, 2021) (``CalPERS''); Jeff Mahoney, General Counsel,
Council of Institutional Investors (Dec. 24, 2021) (``CII''); Ron
Baker, Executive Director, Colorado Public Employees' Retirement
Association (Dec. 27, 2021) (``CO Retirement''); Dan Jamieson (Dec.
7, 2021) (``D. Jamieson''); Nichol Garzon-Mitchell, Senior Vice
President, General Counsel, Glass Lewis (Dec. 27, 2021) (``Glass
Lewis''); Gail C. Bernstein, General Counsel, Investment Adviser
Association (Dec. 27, 2021) (``IAA''); Kerrie Waring, Chief
Executive Officer, ICGN (Dec. 22, 2021) (``ICGN''); Matt Thornton,
Associate General Counsel, and Susan Olson General Counsel,
Investment Company Institute (Dec. 23, 2021) (``ICI''); Gary Retelny
President and CEO, Institutional Shareholder Services Inc. (Dec. 22,
2021) (``ISS''); Justin Giorgio, Doctorate of Computer Science (Nov.
20, 2021) (``J. Giorgio''); Jennifer Han Executive Vice President,
Chief Counsel and Head of Regulatory Affairs, Managed Funds
Association (Dec. 20, 2021) (``MFA''); Melanie Senter Lubin, NASAA
President, Maryland Securities Commissioner (Dec. 27, 2021)
(``NASAA''); Thomas P. DiNapoli, State Comptroller, New York State
Common Retirement Fund (Dec. 27, 2021) (``New York Comptroller'');
Patti Gazda, Corporate Governance Officer, Ohio Public Employees
Retirement System (Dec. 23, 2021) (``Ohio Public Retirement'');
Richard A. Kirby and Beth-ann Roth, RK Invest Law, PBC ESG Legal
Services, Inc. (Dec. 27, 2021) (``RK Invest Law and ESG Legal
Services''); Donna F. Anderson, Vice President, Head of Corporate
Governance, and Bob Grohowski, Managing Legal Counsel, Head of
Legislative and Regulatory Affairs, T. Rowe Price (Dec. 21, 2021)
(``TRP''); Lisa Woll, CEO, US SIF: The Forum for Sustainable and
Responsible Investment (Dec. 23, 2021) (``US SIF''); Theresa
Whitmarsh, Chief Executive Officer, Washington State Investment
Board (Dec. 22, 2021) (``Washington State Investment'').
\41\ See, e.g., letters from CalPERS; CO Retirement; New York
Comptroller; Ohio Public Retirement; TRP; Washington State
Investment.
\42\ See, e.g., letters from CII; ICGN; ICI; IAA; MFA.
\43\ See letters from Alliance; CO Retirement; Glass Lewis; IAA;
ICGN; ISS; NASAA; New York Comptroller; Ohio Public Retirement; US
SIF; Washington State Investment.
\44\ See letters from CO Retirement; Glass Lewis; IAA; ICI; ISS;
MFA; NASAA; New York Comptroller; US SIF.
\45\ See id.
\46\ See letter from Alliance.
\47\ See letter from MFA.
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Other commenters questioned the necessity of the Rule 14a-
2(b)(9)(ii) conditions, asserting that they would not improve the
accuracy of PVABs' advice.\48\ One commenter that is a PVAB stated that
PVABs already are incentivized to engage with registrants regarding
their proxy voting advice in order to provide potentially useful
information to their clients.\49\ Some commenters asserted that
registrants have ways to express their views on proxy voting advice
other than via the Rule 14a-2(b)(9)(ii) conditions, such as by publicly
filing additional soliciting materials,\50\ with one of those
commenters stating the types of investors that utilize proxy voting
advice are sophisticated enough to know where to find registrants'
responses to such advice.\51\ Further,
[[Page 43172]]
several commenters asserted that PVABs' existing practices already
address the concerns underlying the Rule 14a-2(b)(9)(ii) conditions
\52\ and indicated that they expect PVABs to continue to maintain those
practices even if the Rule 14a-2(b)(9)(ii) conditions are
rescinded.\53\
---------------------------------------------------------------------------
\48\ See letters from CalPERS; ICI; TRP; US SIF.
\49\ See letter from Glass Lewis.
\50\ See letters from Glass Lewis; NASAA.
\51\ See letter from NASAA.
\52\ See letters from CII; Glass Lewis; IAA; ICI; ISS; Ohio
Public Retirement.
\53\ See letters from CII; ICI; Ohio Public Retirement.
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Other commenters questioned, as an initial matter, whether the
adoption of the Rule 14a-2(b)(9)(ii) conditions was warranted. For
example, some commenters noted that although the Rule 14a-2(b)(9)(ii)
conditions were intended to benefit investors, most investors did not
request or support the adoption of those conditions.\54\ Other
commenters asserted that the 2020 Adopting Release failed to identify
or provide credible evidence of a market failure.\55\ Some commenters
also highlighted the low prevalence of errors in proxy voting advice
historically, including by reference to data the Commission included in
the 2019 Proposing Release that indicated an approximately 0.3% error
rate in proxy voting advice.\56\ One commenter expressed skepticism
that the Rule 14a-2(b)(9)(ii) conditions would significantly improve
the accuracy of proxy voting advice.\57\ Another commenter observed
that it has not experienced a significant increase in registrant
outreach regarding disputes over proxy voting advice since the adoption
of the 2020 Final Rules, including through the Report Feedback Service
that Glass Lewis implemented and made available to registrants before
the Commission adopted the 2020 Final Rules and continues to make
available.\58\ Other commenters expressed concern that the Rule 14a-
2(b)(9)(ii) conditions inappropriately privilege the views of
registrants' management.\59\ For example, one of these commenters noted
that the Rule 14a-2(b)(9)(ii) conditions ``tilt the playing field in
favor of company management and create unequal access to the proxy
solicitation process'' because those conditions ``do[ ] not require a
PVAB to afford these opportunities to any other stakeholders,''
including shareholder proponents.\60\
---------------------------------------------------------------------------
\54\ See letters from CII; Ohio Public Retirement.
\55\ See letters from Better Markets; Glass Lewis; US SIF.
\56\ See letters from Better Markets; CalPERS; ICI; Ohio Public
Retirement; US SIF; Washington State Investment.
\57\ See letter from ICI.
\58\ See letter from Ohio Public Retirement. This commenter also
noted that much of the registrant feedback that it had observed
``involve[d] differences of opinion regarding the methodologies used
by our proxy advisory firm, which is less useful in helping us to
formulate our proxy votes.'' Id.
\59\ See letters from Alliance; NASAA.
\60\ See letter from NASAA.
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In addition to expressing concerns regarding the Rule 14a-
2(b)(9)(ii) conditions, some commenters highlighted the potential
benefits of rescinding those conditions as proposed. For example, one
commenter stated that the 2021 Proposed Amendments would better ensure
that investors have access to clear, timely, and impartial proxy voting
advice and that the 2021 Proposed Amendments are appropriately tailored
and responsive to investor concerns.\61\ Another commenter asserted
that rescinding the Rule 14a-2(b)(9)(ii) conditions would give PVABs
and investors flexibility to select mechanisms that best serve their
needs and market conditions.\62\
---------------------------------------------------------------------------
\61\ See letter from Alliance.
\62\ See letter from CII.
---------------------------------------------------------------------------
Finally, some of the commenters that supported the 2021 Proposed
Amendments expressed concerns regarding the legal basis or
constitutionality of the Rule 14a-2(b)(9)(ii) conditions. Several
commenters maintained that the Rule 14a-2(b)(9)(ii) conditions exceed
the Commission's authority under Section 14(a) of the Exchange Act
because proxy voting advice does not constitute a ``solicitation.''
\63\ Other commenters asserted that the Rule 14a-2(b)(9)(ii) conditions
could violate the First Amendment.\64\
---------------------------------------------------------------------------
\63\ See letters from CII; ISS; RK Invest Law and ESG Legal
Services.
\64\ See letters from D. Jamieson; Glass Lewis; ISS; RK Invest
Law and ESG Legal Services.
---------------------------------------------------------------------------
A number of commenters opposed rescinding the Rule 14a-2(b)(9)(ii)
conditions and deleting paragraphs (iii) through (vi) of Rule 14a-
2(b)(9).\65\ Several of those commenters expressed concern regarding
the process by which the 2021 Proposed Amendments were formulated,
including by comparison to the process by which the 2020 Final Rules
were adopted. Those process-based concerns generally were based on
commenters' assertions that the 2021 Proposed Amendments were not
justified by sufficient evidence, data, or changes in the market for
proxy voting advice and that the Commission lacked a reasonable basis
for the 2021 Proposed Amendments because the Commission proposed those
amendments before the 2020 Final Rules took effect.\66\
---------------------------------------------------------------------------
\65\ See letters from John Endean, President, American Business
Conference (Dec. 23, 2021) (``ABC''); Kyle Isakower, SVP of
Regulatory and Energy Policy, American Council for Capital Formation
(Dec. 22, 2021) (``ACCF''); Anonymous (Dec. 16, 2021) (``Anonymous
2''); Anne Smith (Dec. 27, 2021) (``A. Smith''); Lynnette Fallon,
Executive Vice President HR/Legal, General Counsel and Secretary,
Axcelis Technologies, Inc. (Dec. 20, 2021) (``Axcelis''); Michele
Nellenbach, Vice President of Strategic Initiatives, Bipartisan
Policy Center (Jan. 4, 2022) (``BPC''); Carlo Passeri, Senior
Director of Capital Markets and Financial Services Policy,
Biotechnology Innovation Organization (Dec. 23, 2021) (``BIO'');
Maria Ghazal, Senior Vice President and Counsel, Business Roundtable
(Dec. 23, 2021) (``BRT''); Benjamin Zycher, Senior Fellow, American
Enterprise Institute (Dec. 23, 2021) (``B. Zycher''); Coalition of
Business Trades (Dec. 23, 2021) (``CBT''); Tom Quaadman, Executive
Vice President, Center for Capital Markets Competitiveness, U.S.
Chamber of Commerce (Nov. 30, 2021) (``CCMC I''); Tom Quaadman,
Executive Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce (Dec. 23, 2021) (``CCMC
II''); Ani Huang, President and CEO, Center On Executive
Compensation (Dec. 27, 2021) (``CEC''); Eric Mills (Dec. 27, 2021)
(``E. Mills''); Mark R. Allen, Executive Vice President, General
Counsel and Secretary, Member of the Executive Committee, FedEx
Corporation (Dec. 23, 2021) (``FedEx''); Frederick A. Brightbill,
CEO and Chairman of the Board, MasterCraft Boat Holdings, Inc. (Dec.
17, 2021) (``MasterCraft''); Chris Netram, Vice President, Tax and
Domestic Economic Policy, National Association of Manufacturers
(Dec. 24, 2021) (``NAM''); John A. Zecca, Executive Vice President,
Chief Legal and Regulatory Officer, Nasdaq, Inc. (Dec. 27, 2021)
(``Nasdaq''); Stephen C. Taylor and John W. Chisholm, Chairman,
President, CEO, and Lead Independent Director, Natural Gas Services
Group, Inc. (Dec. 27, 2021) (``Natural Gas Services''); Gary A.
LaBranche, FASAE, CAE, President and CEO, National Investor
Relations Institute (Dec. 27, 2021) (``NIRI''); Wayne Winegarden,
Ph.D., Sr. Fellow, Business and Economics Pacific Research Institute
(Dec. 22, 2021) (``Pacific Research''); J.W. Verret, George Mason
University Antonin Scalia Law School (Dec. 21, 2021) (``Prof.
Verret''); Paul Rose and Christopher J. Walker, Professors of Law,
The Ohio State University (Dec. 22, 2021) (``Profs. Rose and
Walker''); Bryan Steil and Bill Huizenga, Members of Congress (Feb.
2, 2022) (``Reps. Steil and Huizenga''); Ted Allen, Vice President,
Policy and Advocacy, Society for Corporate Governance (Dec. 30,
2021) (``SCG''); Tim Doyle, Founder and Principle, Doyle Strategies,
LLC (Dec. 27, 2021) (``T. Doyle''); Douglas A. Cifu, Chief Executive
Officer, Virtu Financial, Inc. (Dec. 20, 2021) (``Virtu'').
\66\ See letters from ABC; ACCF; BIO; BRT; B. Zycher; CBT; CCMC
II; CEC; E. Mills; NAM; Natural Gas Services; NIRI; Pacific
Research; Prof. Verret; Reps. Steil and Huizenga; SCG; T. Doyle;
Virtu.
---------------------------------------------------------------------------
Similarly, some commenters submitted a report that analyzed and
highlighted the benefits of the 2020 Final Rules as support for the
proposition that those rules were adopted pursuant to a careful,
methodical process and should not be amended at this time.\67\ Other
commenters expressed concern that registrants and investors may have
changed their practices in reliance on the Commission's adoption of the
2020 Final Rules,\68\ with one of these commenters indicating that it
and other registrants have been preparing for the
[[Page 43173]]
effectiveness of the 2020 Final Rules.\69\ One commenter asserted that
the 2021 Proposing Release did not take into account the factors that
Congress intended the Commission to consider with respect to Section
14(a) of the Exchange Act.\70\ Finally, several commenters raised
concerns regarding the 30-day comment period specified in the 2021
Proposing Release, including concerns that such comment period did not
provide the public sufficient time to consider and comment on the 2021
Proposed Amendments.\71\
---------------------------------------------------------------------------
\67\ See letters from CCMC II; Profs. Rose and Walker.
\68\ See letters from NAM; Nasdaq; Natural Gas Services; Prof.
Verret.
\69\ See letter from Natural Gas Services.
\70\ See letter from CCMC II.
\71\ See letters from ABC; American Securities Association (Dec.
3, 2021); BIO; CCMC I; CCMC II; CEC; IAA; NIRI; Prof. Verret; SCG;
Reps. Steil and Huizenga; Patrick McHenry, Ranking Member, House
Committee on Financial Services, and Pat Toomey, Ranking Member,
Senate Committee on Banking, Housing, and Urban Affairs (Jan. 10,
2022) (``Rep. McHenry and Sen. Toomey''); T. Doyle. We believe that
the 30-day comment period for the 2021 Proposed Amendments provided
adequate opportunity for interested parties to share their views,
especially given the targeted nature of such amendments. We have
reviewed and considered the numerous comment letters received in
response to the proposal, including the five comment letters
submitted after the comment period deadline. See letters from BPC;
Reps. Steil and Huizenga; SCG; Rep. McHenry and Sen. Toomey; S.
Milloy.
---------------------------------------------------------------------------
In addition to expressing concern about the process by which the
2021 Proposed Amendments were formulated, some commenters asserted that
rescinding the Rule 14a-2(b)(9)(ii) conditions would have a negative
impact on proxy voting advice. For example, some commenters stated that
rescinding the Rule 14a-2(b)(9)(ii) conditions would decrease the
transparency and accuracy of proxy voting advice and confidence in the
proxy process generally.\72\ Relatedly, another commenter asserted that
the Rule 14a-2(b)(9)(ii) conditions would improve the accuracy and
reliability of proxy voting advice.\73\ Other commenters expressed
concern that rescinding the Rule 14a-2(b)(9)(ii) conditions would
jeopardize the Commission's stated goals for the 2020 Final Rules \74\
and would decrease the amount of information available to
investors.\75\
---------------------------------------------------------------------------
\72\ See letters from BPC; CEC; E. Mills; MasterCraft; NAM;
Nasdaq; Natural Gas Services; Pacific Research.
\73\ See letter from NAM.
\74\ See letter from Profs. Rose and Walker.
\75\ See letter from B. Zycher.
---------------------------------------------------------------------------
Further, some commenters asserted that without the Rule 14a-
2(b)(9)(ii) conditions, registrants will struggle to address PVABs'
advice in a timely manner before a shareholder meeting.\76\ One of
these commenters asserted that if registrants do not have an
opportunity to timely address the logic behind a voting recommendation,
PVABs can ``essentially unilaterally control[ ] the outcome of''
shareholder votes.\77\ Some commenters also cited support from
registrants, investors, and others for the Rule 14a-2(b)(9)(ii)
conditions, including certain surveys,\78\ and the historically
bipartisan support for reforming the proxy process.\79\
---------------------------------------------------------------------------
\76\ See letters from Axcelis; CEC; Natural Gas Services; T.
Doyle.
\77\ See letter from Axcelis.
\78\ See letter from Nasdaq. This commenter cited a 2020 proxy
season survey indicating that registrants would utilize the Rule
14a-2(b)(9)(ii) conditions (the ``CCMC and Nasdaq survey'') and a
survey conducted in Nov. 2019 indicating that retail investors were
in favor of providing registrants with an opportunity to review and
provide feedback on proxy voting advice (the ``Spectrem Group
survey''). Id.
\79\ See letter from BPC.
---------------------------------------------------------------------------
Some commenters maintained that the Commission should retain the
Rule 14a-2(b)(9)(ii) conditions due to continued concerns regarding
errors in proxy voting advice. For example, some commenters asserted
that a 2021 study (the ``ACCF study'') demonstrates the continued
prevalence of errors in, and disagreements by registrants with, proxy
voting advice.\80\ According to the ACCF study, there were 50 instances
in 2021 in which registrants filed supplemental proxy materials to
dispute the data or analysis in a PVAB's proxy voting advice, an
increase from 42 such instances in 2020.\81\ That study also asserted
that the Rule 14a-2(b)(9)(ii) conditions provide a better process for
registrants to access and respond to proxy voting advice than the
current process in which registrants ``who receive a proxy advisor
recommendation where they believe there is an error or serious
disagreement must submit a supplemental filing to their proxy statement
and take on additional anti-fraud liability.'' \82\ Another commenter
cited a December 2019 survey of compensation and human resource
professionals at 105 public registrants (the ``Willis Towers Watson
survey'') in which 59% of respondents ``considered factual errors to be
a big problem under the current system'' of proxy voting advice.\83\ In
addition, several commenters highlighted their own experience with, or
anecdotal evidence of, inaccurate or misleading proxy voting advice and
described the burdens associated with responding to and correcting such
advice in a timely manner.\84\ Another commenter expressed the view
that the prevalence of errors in and omissions from proxy voting advice
has not changed since 2020, citing a December 2019 survey of its
members (the ``SCG survey'').\85\ Several other commenters asserted
that the 2020 Final Rules would allow registrants to more efficiently
and effectively communicate their perspective on errors in and
disagreements with proxy voting advice.\86\
---------------------------------------------------------------------------
\80\ See letters from ACCF; CCMC II; CEC; Natural Gas Services;
NIRI; Profs. Rose and Walker.
\81\ See American Council for Capital Formation, Proxy Advisors
Are Still a Problem: 2021 Proxy Season Analysis Shows Companies
Continue To Report Similar Rate of Errors Despite Heightened
Scrutiny 9-10 (Dec. 2021) (``ACCF Study''), available at <a href="https://accf.ftlbcdn.net/wp-content/uploads/2021/12/ACCF_proxy_advisor_rule_report_2021-FINAL.pdf">https://accf.ftlbcdn.net/wp-content/uploads/2021/12/ACCF_proxy_advisor_rule_report_2021-FINAL.pdf</a>.
\82\ Id. at 11-12.
\83\ See letter from T. Doyle. Mr. Doyle's comment letter on the
2019 Proposed Rules also cited this same Dec. 2019 survey. See
letter in response to the 2019 Proposing Release of T. Doyle (Feb.
3, 2020), available at <a href="https://www.sec.gov/comments/s7-22-19/s72219-6742431-207767.pdf">https://www.sec.gov/comments/s7-22-19/s72219-6742431-207767.pdf</a>.
\84\ See letters from Nasdaq; Natural Gas Services.
\85\ See letter from SCG. SCG's membership is comprised ``of
more than 3,400 corporate and assistant secretaries, in-house
counsel, outside counsel, and other governance professionals who
serve approximately 1,600 entities, including 1,000 public companies
of almost every size and industry.'' Id. SCG's comment letter on the
2019 Proposed Rules also cited this same Dec. 2019 survey. See
letter in response to the 2019 Proposing Release of SCG (Feb. 3,
2020), available at <a href="https://www.sec.gov/comments/s7-22-19/s72219-6743687-207853.pdf">https://www.sec.gov/comments/s7-22-19/s72219-6743687-207853.pdf</a>. The Dec. 2019 survey of 134 members found that
42% of respondents answered affirmatively when asked whether they
were ``aware of any factual errors, omissions of material facts, or
errors in analysis in the last three years.'' Id.
\86\ See letters from ACCF; Natural Gas Services; T. Doyle.
---------------------------------------------------------------------------
Other commenters disputed the concerns expressed regarding the Rule
14a-2(b)(9)(ii) conditions that the 2021 Proposing Release described.
Some commenters asserted that the Rule 14a-2(b)(9)(ii) conditions would
not disproportionately or negatively impact the independence, cost, or
timeliness of proxy voting advice.\87\ One commenter stated that the
Commission's concern for the timeliness and cost of proxy voting advice
is misplaced given that the 2020 Final Rules did not require advance
review of proxy voting advice.\88\ This commenter also disputed the
notion that the Rule 14a-2(b)(9)(ii) conditions would increase costs
for PVABs.\89\ Other commenters asserted that PVABs' compliance costs
associated with the Rule 14a-2(b)(9)(ii) conditions did not support
rescinding those conditions in light of the duopolistic nature of the
proxy voting advice market.\90\ Finally, some commenters stated that,
even if the Rule 14a-2(b)(9)(ii) conditions increase the costs of proxy
voting advice, such costs
[[Page 43174]]
are justified and preferred by investors if they ensure accurate advice
and give registrants a chance to respond to such advice in a timely
manner.\91\
---------------------------------------------------------------------------
\87\ See letters from ABC; BIO; BRT; NAM; T. Doyle.
\88\ See letter from Axcelis.
\89\ See id.
\90\ See letters from BIO; B. Zycher.
\91\ See letters from Axcelis; Natural Gas Services.
---------------------------------------------------------------------------
Several commenters took issue with the Commission's discussion in
the 2021 Proposing Release of PVABs' existing practices. Some of those
commenters asserted that PVABs' current practices are insufficient
substitutes for the Rule 14a-2(b)(9)(ii) conditions, which, in the view
of these commenters, provide more comprehensive and consistent
standards.\92\ Other commenters asserted that the Commission's
discussion of PVABs' policies and procedures does not support
rescission of the Rule 14a-2(b)(9)(ii) conditions.\93\ One commenter
asserted that because ISS and Glass Lewis already provide registrants
access to their advice at the same time that it is disseminated to
their clients, compliance with the Rule 14a-2(b)(9)(ii) conditions
should not be burdensome.\94\ Other commenters expressed concern that
without the Rule 14a-2(b)(9)(ii) conditions, PVABs could change their
practices to the detriment of their clients.\95\
---------------------------------------------------------------------------
\92\ See letters from BIO; BRT; CEC; NAM; Nasdaq; NIRI; SCG; T.
Doyle.
\93\ See letters from CCMC II; Prof. Verret.
\94\ See letter from CEC.
\95\ See letters from BIO; SCG.
---------------------------------------------------------------------------
Similarly, some commenters expressed specific concerns regarding
ISS' practices. One commenter asserted that ISS has increasingly
resisted making changes to its proxy voting advice in response to
registrant feedback and has been less inclined to engage with
registrants regarding its advice.\96\ Other commenters stated that ISS
has recently reduced communications and transparency below what it
would have provided prior to the adoption of the 2020 Final Rules by
ending its practice of providing S&P 500 companies with the opportunity
to review and provide feedback on draft proxy voting advice.\97\ Some
of these commenters highlighted the fact that ISS still provides
registrants in jurisdictions other than the U.S. with this
opportunity.\98\ Finally, one commenter asserted that, because ISS no
longer provides U.S. registrants with an opportunity to review draft
proxy voting advice, more errors in proxy voting advice now go
uncorrected.\99\
---------------------------------------------------------------------------
\96\ See letter from CEC.
\97\ See letters from CCMC II; CEC; Nasdaq; SCG.
\98\ See letters from Nasdaq; SCG.
\99\ See letter from SCG.
---------------------------------------------------------------------------
One commenter referenced broader, policy-based justifications for
opposing the proposed amendments to Rule 14a-2(b)(9). For example, the
commenter expressed concern that rescinding the Rule 14a-2(b)(9)(ii)
conditions would exempt PVABs from the transparency standards that the
Commission applies to other similarly-situated market participants,
such as exchanges, registrants, and broker-dealers.\100\ This commenter
also highlighted the duopolistic nature of the proxy voting advice
market as a justification for additional regulation, rather than de-
regulation, of PVABs to ensure transparency.\101\
---------------------------------------------------------------------------
\100\ See letter from BIO.
\101\ See id.
---------------------------------------------------------------------------
Finally, some commenters expressed concerns regarding potential
consequences of rescinding the Rule 14a-2(b)(9)(ii) conditions. One
commenter expressed concern that, without these conditions, the
Commission would allow PVABs to be exempt from the proxy rules'
information and filing requirements without sufficient alternative
investor protection mechanisms to justify that exemption.\102\ Another
commenter expressed concern that rescinding the Rule 14a-2(b)(9)(ii)
conditions would reduce the transparency of proxy voting advice and
allow PVABs to increase the relative weight of their political
preferences, such as by introducing environmental, social, and
governance (``ESG'') objectives.\103\ Similarly, one commenter cited a
2021 research paper that found that PVABs' advice favors ESG proposals
that may not necessarily be in the best economic interests of all
investors.\104\ Another commenter asserted that although it appreciated
the Commission's retention of the conflicts of interest disclosure
requirement in Rule 14a-2(b)(9)(i), that requirement is hollow without
the Rule 14a-2(b)(9)(ii) conditions.\105\
---------------------------------------------------------------------------
\102\ See letter from Prof. Verret (``This new proposal would
generate all the harm that may come from allowing the proxy advisors
an exemption from the proxy solicitation rules with none of the
mechanisms previously attached to the exemption to limit conflicts
and to address problems with the reliability of proxy advisor
recommendations.'').
\103\ See letter from B. Zycher.
\104\ See letter from CCMC II.
\105\ See letter from Natural Gas Services.
---------------------------------------------------------------------------
In addition to expressing concerns regarding the 2021 Proposed
Amendments, some commenters that opposed the proposed rescission of the
Rule 14a-2(b)(9)(ii) conditions made alternative recommendations to the
Commission. For example, some commenters recommended that the
Commission commit to a retrospective review of the 2020 Final Rules
rather than adopting the 2021 Proposed Amendments.\106\ One commenter
recommended that the Commission rescind the 2021 Proposed Amendments
and issue an Advanced Notice of Proposed Rulemaking that would permit
all interested parties to provide input and inform the Commission's
deliberations on whether to reconsider the 2020 Final Rules.\107\
Another commenter suggested that the Commission could mitigate concerns
about whether waiting for a registrant's response to proxy voting
advice could shorten the proxy voting period by providing guidance on
how long a registrant has to provide a response or the applicability of
the rules in sensitive cases (e.g., proxy contests, vote no campaigns,
or special meetings).\108\ One commenter recommended that the
Commission adopt an ``advance review and feedback'' requirement
consistent with the 2019 Proposed Rules.\109\ Another commenter
recommended that if the Commission does not believe that the 2020 Final
Rules are appropriate, it should consider implementing an alternative
regulatory framework.\110\ In addition, one commenter asserted that the
Rule 14a-2(b)(9)(ii) conditions should be maintained but modified to
require that PVABs provide their advice to registrants at no cost.\111\
---------------------------------------------------------------------------
\106\ See letters from ABC; BIO; NAM; NIRI; Virtu.
\107\ See letter from CCMC I.
\108\ See letter from CEC.
\109\ See letter from NIRI.
\110\ See letter from SCG.
\111\ See letter from Axcelis.
---------------------------------------------------------------------------
Finally, one commenter, which generally supported the proposal,
recommended that the Commission focus more on the accuracy of
registrants' disclosures, rather than PVABs, given the low incidence of
errors in their proxy voting advice.\112\
---------------------------------------------------------------------------
\112\ See letter from CalPERS.
---------------------------------------------------------------------------
3. Final Amendments
We are adopting the amendments to Rule 14a-2(b)(9) as proposed.
Specifically, we are amending Rule 14a-2(b)(9) to delete paragraphs
(ii), (iii), (iv), (v), and (vi) and to redesignate Rule 14a-2(b)(9)(i)
as Rule 14a-2(b)(9).
The Commission recognized when it adopted the 2020 Final Rules that
``introducing new rules into a complex system like proxy voting . . .
could inadvertently disrupt the system and impose unnecessary costs if
not carefully calibrated.'' \113\ The Commission acknowledged that many
investors had expressed serious concerns that the proposed advance
review and feedback conditions would adversely affect the cost,
timeliness, and independence of proxy voting advice.\114\ The
Commission nonetheless concluded
[[Page 43175]]
that the Rule 14a-2(b)(9)(ii) conditions adequately mitigated those
concerns and, despite existing mechanisms in the proxy voting system
that advance similar objectives, were justified in light of their
potential to facilitate timely access by PVABs' clients to information
material to their voting decisions.\115\
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\113\ 2020 Adopting Release at 55107.
\114\ Id. at 55107-08, 55111-12.
\115\ Id.
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We weigh these competing concerns differently today, especially in
light of the continued, strong opposition to the Rule 14a-2(b)(9)(ii)
conditions from many institutional investors and other PVAB clients as
well as many of the comments we received on the 2021 Proposed
Amendments. The Commission's 2020 adoption of the Rule 14a-2(b)(9)(ii)
conditions was grounded in its view that ``more complete and robust
information and discussion leads to more informed investor decision-
making.'' \116\ We agree with that general principle, but, upon further
analysis in light of the continued concerns expressed by investors and
others, we now conclude that the potential informational benefits to
investors of the Rule 14a-2(b)(9)(ii) conditions do not sufficiently
justify the risks they pose to the cost, timeliness, and independence
of proxy voting advice on which many investors rely.
---------------------------------------------------------------------------
\116\ Id. at 55107.
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Investor protection has always been the touchstone of the
Commission's rulemaking efforts with respect to PVABs. Accordingly, our
decision to rescind the Rule 14a-2(b)(9)(ii) conditions is
significantly informed by the concerns expressed by investors and other
PVAB clients regarding the Rule 14a-2(b)(9)(ii) conditions. PVABs serve
an important role in the proxy process, and their clients depend on
receiving independent proxy voting advice in a timely manner. The Rule
14a-2(b)(9)(ii) conditions were intended to benefit PVABs' clients
(i.e., institutional investors and investment advisers) and the
underlying investors they serve, among others.\117\ However, many
investors and PVAB clients have continued to warn, both in response to
the adoption of the 2020 Final Rules and again in comments on the 2021
Proposing Release, that the Rule 14a-2(b)(9)(ii) conditions risk
impairing the independence and timeliness of proxy voting advice and
imposing increased compliance costs on PVABs, without corresponding
investor protection benefits.\118\ And, as noted above,\119\ we agree
that the risks posed by the Rule 14a-2(b)(9)(ii) conditions to the
cost, timeliness, and independence of proxy voting advice are
sufficiently significant such that it is appropriate to rescind the
conditions now to limit any burdens that PVABs and their clients may
experience.
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\117\ See supra notes 31-34 and accompanying text.
\118\ See supra notes 43-47 and accompanying text; 2021
Proposing Release at 67385 & nn.23-24 (citing Peter Rasmussen,
Divided SEC Passes Controversial Proxy Advisor Rule, Bloomberg Law
(July 29, 2020), available at <a href="https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-divided-sec-passes-controversial-proxy-advisor-rule">https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-divided-sec-passes-controversial-proxy-advisor-rule</a> (noting criticism of the 2020 Final Rules by Nell
Minow, Vice Chair of ValueEdge Advisors, that the 2020 Final Rules
will make proxy voting advice ``more expensive and less
independent''); Council of Institutional Investors, Leading Investor
Group Dismayed by SEC Proxy Advice Rules (July 22, 2020), available
at <a href="https://www.cii.org/july22_sec_proxy_advice_rules">https://www.cii.org/july22_sec_proxy_advice_rules</a> (``[T]he new
rules . . . seem to effectively require investment advisors who vote
proxies on behalf of investor clients to consider and evaluate any
response from companies to proxy advice before submitting votes.
That could cause significant delays in the already constricted proxy
voting process. It also could jeopardize the independence of proxy
advice as proxy advisory firms may feel pressure to tilt voting
recommendations in favor of management more often, to avoid critical
comments from companies that could draw out the voting process and
expose the firms to costly threats of litigation.''); US SIF, US SIF
Releases Statement on SEC Vote to Regulate Proxy Advisory Firms
(July 22, 2020), available at <a href="https://www.ussif.org/blog_home.asp?display=146">https://www.ussif.org/blog_home.asp?display=146</a> (``Today's vote is a blow to the
independence of research provided by proxy advisors to investors. .
. . The rule will make it more difficult, expensive and time-
consuming for proxy advisors to produce their research.'')).
\119\ See supra notes 113-116 and accompanying text.
---------------------------------------------------------------------------
Although we recognize that some commenters disputed these
concerns,\120\ we nonetheless believe that the risks to investors
support rescinding the Rule 14a-2(b)(9)(ii) conditions, particularly in
light of the limited reliance interests at stake \121\ and the
existence of other mechanisms in the proxy system that promote informed
shareholder voting.\122\ It is also noteworthy that the vast majority
of PVABs' clients and investors that expressed views on the Rule 14a-
2(b)(9)(ii) conditions continue to be concerned about the risks those
conditions pose, including institutional investors \123\ and
organizations that represent institutional investors and investment
advisers.\124\
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\120\ See supra notes 87-91 and accompanying text.
\121\ See infra notes 153-154 and accompanying text.
\122\ See infra notes 139-141 and accompanying text.
\123\ See letters from CalPERS; CO Retirement; New York
Comptroller; Ohio Public Retirement; TRP; Washington State
Investment.
\124\ See letters from CII; ICGN; ICI; IAA; MFA. We recognize
that one commenter cited the Spectrem Group survey which indicated
that 79% of retail investors were in favor of providing registrants
with an opportunity to review and provide feedback on proxy voting
advice. See supra note 78 and accompanying text; Spectrem Group,
Reclaiming Main Street: SEC Hears Retail Investors' Cries for Proxy
Advisory Oversight 3 (Dec. 16, 2019), available at <a href="https://spectrem.com/Content_Whitepaper/white-paper-reclaiming-main-street.aspx">https://spectrem.com/Content_Whitepaper/white-paper-reclaiming-main-street.aspx</a>. We note, however, that no such investors submitted
comments opposing the proposed rescission of the Rule 14a-
2(b)(9)(ii) conditions. We further note that the Spectrem Group
survey was conducted in Nov. 2019 with respect to the 2019 Proposed
Rules rather than the 2020 Final Rules and, therefore, is less
relevant for our determination as to whether to rescind the Rule
14a-2(b)(9)(ii) conditions. In addition, as discussed in the 2020
Adopting Release, one commenter on the 2019 Proposed Rules
``disputed the methodology used'' in the Spectrem Group survey and
``claim[ed] it used leading questions and ultimately showed that
retail investors are generally uninformed about the proxy voting
advice market.'' 2020 Adopting Release at 55125, n.491. One
commenter also cited the CCMC and Nasdaq survey indicating that 97%
of the 182 registrants surveyed would utilize the Rule 14a-
2(b)(9)(ii) conditions. See supra note 78 and accompanying text.
But, for the reasons discussed above, we do not believe the
potential benefits of those conditions are justified in light of the
risks they present. In addition, while we recognize that this survey
indicates that registrants would use the conditions, we do not
believe that the Rule 14a-2(b)(9)(ii) conditions have engendered
significant reliance interests for the reasons discussed later in
this section.
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Nor do we find the studies and surveys that some opposing
commenters cited as support for their continued concerns regarding
errors in proxy voting advice to be persuasive evidence for retaining
the Rule 14a-2(b)(9)(ii) conditions.\125\ For example, several
commenters asserted that the ACCF study demonstrates the continued
prevalence of errors in, and disagreements by registrants with, proxy
voting advice.\126\ As an initial matter, we note that the 2020 Final
Rules were not predicated on any Commission finding with regard to the
prevalence of errors in proxy voting advice,\127\ which
[[Page 43176]]
was a matter of dispute among commenters on both the 2019 Proposed
Rules \128\ and the 2021 Proposed Amendments.\129\ In any event, the
ACCF study does not, in our view, establish the necessity of the Rule
14a-2(b)(9)(ii) conditions. Rather, in the 50 instances that the study
identified, registrants were able to effectively review and respond to
proxy voting advice. Those 50 instances included situations in which a
registrant alleged that a PVAB's advice contained a factual or
analytical error and situations in which the registrant had a ``serious
dispute'' with a PVAB's advice (or a combination of these
concerns).\130\ The registrant, in turn, either provided corrective
disclosure with respect to the purported factual or analytical error or
explained the basis for its dispute with the proxy voting advice.\131\
This form of discourse is precisely what the Commission envisioned when
adopting the Rule 14a-2(b)(9)(ii) conditions.\132\ It is noteworthy
that registrants were able to identify those issues and respond using
pre-existing mechanisms rather than mechanisms that were adopted to
satisfy the Rule 14a-2(b)(9)(ii) conditions given that individual PVABs
generally do not appear to have implemented new practices in response
to the Commission's adoption of the 2020 Final Rules.\133\
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\125\ See supra notes 80-83, 85 and accompanying text.
\126\ See supra notes 80-82 and accompanying text.
\127\ See 2020 Adopting Release at 55107. We note that the
Willis Towers Watson survey and the SCG survey both were conducted
in Dec. 2019, before the Commission adopted the 2020 Final Rules,
and were submitted by commenters on the 2019 Proposed Rules. See
supra notes 83, 85 and accompanying text. The Commission, however,
did not rely on either survey as support for adopting the Rule 14a-
2(b)(9)(ii) conditions. We also do not find those surveys to be
persuasive indicators of systemic inaccuracies in proxy voting
advice, as neither survey identified any specific instances of
errors in proxy voting advice. In addition, although the ACCF study
identified 50 and 42 instances, respectively, in 2021 and 2020 in
which registrants filed supplemental proxy materials to dispute the
data or analysis in a PVAB's proxy voting advice, when compared to
the 5,565 and 5,350 unique registrants that filed proxy materials
with the Commission in 2021 and 2020, respectively, see infra note
274 and accompanying text, that study indicates that only 0.90% of
all registrants disputed a PVAB's proxy voting advice in
supplemental filings in 2021, which is only a 0.11% increase (i.e.,
0.90% versus 0.79%) from 2020. Finally, it is worth noting that
these percentages may not reflect the error rates in proxy voting
advice, as the fact that a registrant raises a dispute regarding
proxy voting advice in a supplemental filing does not necessarily
indicate that an error exists in such advice.
\128\ See 2020 Adopting Release at 55103-04.
\129\ See supra note 56 and accompanying text; see also letter
from ICI (expressing skepticism that the Rule 14a-2(b)(9)(ii)
conditions would significantly improve the accuracy of proxy voting
advice).
\130\ ACCF Study, supra note 81, at 14-17.
\131\ Id.
\132\ See 2020 Adopting Release at 55136 (noting that
registrants may wish to respond to proxy voting advice for various
reasons, including ``because they have identified what they perceive
to be factual errors or methodological weaknesses in the [PVAB's]
analysis or because they have a different or additional perspective
with respect to the recommendation'').
\133\ See infra note 142 and accompanying text. Although PVABs
have introduced certain industry-wide practices since the Commission
adopted the 2020 Final Rules, the relevant practices at individual
PVABs described in the 2021 Proposing Release appear to have been in
place prior to the adoption of the 2020 Final Rules. See 2021
Proposing Release at 67388 & nn.60-61.
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It also is unclear how retaining the Rule 14a-2(b)(9)(ii)
conditions would address concerns raised by the ACCF study about the
process by which registrants respond to proxy voting advice. The study
asserts that supplemental proxy filings, which ACCF reviewed to arrive
at its findings, are costly and burdensome, and subject registrants to
antifraud liability.\134\ The 2020 Adopting Release contemplated,
however, that even pursuant to the Rule 14a-2(b)(9)(ii) conditions,
registrants would respond to proxy voting advice via a supplemental
proxy filing.\135\ Finally, although the study asserts that the Rule
14a-2(b)(9)(ii) conditions ``would better ensure that investors review
information that companies are now including in often ignored
supplemental filings,'' \136\ we expect that the types of investors
that utilize proxy voting advice are sufficiently sophisticated to know
where to find registrants' responses to such advice.\137\
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\134\ ACCF Study, supra note 81, at 10-11.
\135\ See, e.g., 2020 Adopting Release at 55135-36 (``Providing
timely notice to registrants of voting advice will allow registrants
to more effectively determine whether they wish to respond to the
recommendation by publishing additional soliciting materials . . .
.''). While the Rule 14a-2(b)(9)(iv) safe harbor is non-exclusive,
it also contemplates that registrants will file additional
soliciting materials as it requires a PVAB to have ``written
policies and procedures that are reasonably designed to inform
clients who receive proxy voting advice when a registrant . . .
notifies the [PVAB] that it intends to file or has filed additional
soliciting materials.'' 17 CFR 240.14a-2(b)(9)(iv).
\136\ ACCF Study, supra note 81, at 12.
\137\ See supra note 51 and accompanying text. Additionally, it
is our understanding that the leading PVABs currently provide their
clients with notifications of and links to filings by registrants
that are the subject of proxy voting advice in their online
platforms, which provide a means for clients to access additional
definitive proxy materials that registrants may file in response to
proxy voting advice. 2021 Proposing Release at 67388, n.57.
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We note that several commenters expressed concerns regarding the
potential adverse impacts of rescinding the Rule 14a-2(b)(9)(ii)
conditions, including the ability of registrants to address errors in
or disagreements with proxy voting advice in a timely manner.\138\ To
the extent the Rule 14a-2(b)(9)(ii) conditions help to facilitate
timely investor access to information material to their voting
decisions, we recognize that rescinding those conditions could reduce
those benefits. At the same time, we note that any such benefits of the
Rule 14a-2(b)(9)(ii) conditions could be undermined to the extent those
conditions make proxy voting advice more costly or reduce its
timeliness and independence.\139\ In our judgment, the potential
benefits of the Rule 14a-2(b)(9)(ii) conditions do not justify these
risks.
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\138\ See supra notes 72-77 and accompanying text.
\139\ See supra notes 43-47 and accompanying text. For example,
to the extent that the Rule 14a-2(b)(9)(ii) conditions impede the
timeliness of proxy voting advice, that could impair the ability of
PVABs' clients to receive and process that advice sufficiently in
advance of the relevant shareholder vote.
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We also believe that any negative effects of rescinding the Rule
14a-2(b)(9)(ii) conditions will be mitigated, to some extent, by
existing mechanisms in the proxy system that advance some of the same
goals. As one commenter pointed out, PVABs already are incentivized to
engage with registrants regarding their proxy voting advice, as
evidenced by the fact that some PVABs voluntarily implemented means for
registrants to communicate their views or concerns regarding the PVABs'
advice even before the Commission adopted the 2020 Final Rules (e.g.,
Glass Lewis' Report Feedback Service).\140\ These incentives also are
demonstrated by the fact that the leading PVABs have voluntarily
adopted practices that provide their clients and registrants with some
of the opportunities and access to information that would have been
required pursuant to the Rule 14a-2(b)(9)(ii) conditions. We described
those practices in detail in the 2021 Proposing Release.\141\ Based on
our review of PVABs' public descriptions of their policies and
procedures, those practices appear to remain in place. Further, none of
the comment letters submitted on the 2021 Proposed Amendments asserted
that PVABs' practices differ from those described in the 2021 Proposing
Release or that PVABs had altered those practices described in the
release.\142\
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\140\ See supra note 49 and accompanying text. One commenter
also stated that it has not experienced a significant increase in
registrant outreach regarding disputes over proxy voting advice
since the adoption of the 2020 Final Rules, including through Glass
Lewis' Report Feedback Service. See supra note 58 and accompanying
text; see also 2021 Proposing Release at 67386 (describing Glass
Lewis' Report Feedback Service).
\141\ See 2021 Proposing Release at 67386-87.
\142\ We note that some commenters expressed concerns regarding
ISS' practices. For example, several commenters expressed concern
that ISS has eliminated the opportunity for certain U.S. registrants
to review draft proxy voting advice before ISS sends the advice to
its clients. See supra note 97 and accompanying text. One of those
commenters appeared to assert that ISS made this change ``in
reaction to the SEC's announcement of the non-enforcement of the
2020 Final Rules.'' Letter from CCMC II. However, ISS announced that
it was making this change as of January 2021, well before June 1,
2021, when the Division of Corporation Finance issued a statement
that it would not recommend enforcement action based on a 2019
interpretive release (discussed further infra note 165 and
accompanying text) or the 2020 Final Rules during the period in
which the Commission is considering further regulatory action in
this area. Compare ISS, FAQs Regarding ISS Proxy Research, available
at <a href="https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920">https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276867038-b204d1c3-a920</a> (``In the US, as from January
2021, drafts are no longer provided to U.S. companies including
those in the S&P 500 index.''), with Division of Corporation
Finance, Statement on Compliance with the Commission's 2019
Interpretation and Guidance Regarding the Applicability of the Proxy
Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b),
14a-9, U.S. Securities and Exchange Commission, available at <a href="https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01">https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01</a>.
Given this timing, the assertion that ISS formally altered its
engagement practices as a result of the Division of Corporation
Finance's statement or in response to the 2021 Proposed Amendments
is implausible. In addition, some commenters noted that ISS provides
some non-U.S. companies with the opportunity to review its draft
proxy voting advice before its publication. Similarly, one commenter
asserted that ISS has increasingly resisted making changes to its
proxy voting advice in response to registrant feedback and has been
less inclined to engage with registrants regarding its proxy voting
advice. See supra note 96 and accompanying text. This commenter
asserted that ``[c]ompanies have requested discussions with ISS
staff to highlight errors, omissions, or mischaracterizations, but
the ISS research team has noticeably scaled back its willingness to
engage'' and that ``given that errors corrected post-publication
necessitate a public alert to clients, ISS is far more reticent to
make such changes and even more resistant if the error requires a
change in a vote recommendation.'' Letter from CEC. Based on those
concerns, the commenter appeared to advocate for giving registrants
the opportunity to review proxy voting advice before its
publication. Id. (``Thus, fixing errors highlighted by companies in
a final report is much more complex than doing so to a draft
report.''). Rescinding the Rule 14a-2(b)(9)(ii) conditions, however,
should not impact the availability of such opportunities because the
conditions do not require that PVABs provide registrants with draft
proxy voting advice. We find it more relevant that ISS continues to
allow any registrant to request a copy of its proxy voting advice
issued under its Benchmark policy guidelines free of charge after
ISS has disseminated the advice to its clients. See ISS, FAQs
Regarding ISS Proxy Research, available at <a href="https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276741161-7ca718d3-32ae">https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/#1574276741161-7ca718d3-32ae</a>.
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[[Page 43177]]
Several commenters expressed concern that PVABs' current practices
are insufficient substitutes for the Rule 14a-2(b)(9)(ii)
conditions.\143\ As noted in the 2021 Proposing Release,\144\ we
recognize that those practices do not perfectly replicate the
requirements of the Rule 14a-2(b)(9)(ii) conditions or result in the
same benefits that those conditions were intended to produce.
Nonetheless, the existence of market-based incentives for PVABs to
provide their clients and some registrants with some of the
opportunities and access to information that would have been required
pursuant to the Rule 14a-2(b)(9)(ii) conditions \145\--which may
provide institutional investors and other PVAB clients with some of the
benefits that those conditions were intended to produce--reinforces our
determination that those conditions should be rescinded, especially
when balanced against the risks that those conditions present to the
cost, timeliness, and independence of proxy voting advice.
---------------------------------------------------------------------------
\143\ See supra note 92 and accompanying text.
\144\ See 2021 Proposing Release at 67388.
\145\ See letter from Glass Lewis (asserting that PVABs already
are incentivized to engage with registrants regarding their proxy
voting advice in order to provide potentially useful information to
their clients).
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Further, one opposing commenter asserted that because ISS and Glass
Lewis already provide registrants with access to their advice at the
same time it is disseminated to their clients, compliance with the Rule
14a-2(b)(9)(ii) conditions should not be burdensome.\146\ We note,
however, that ISS and Glass Lewis adopted those practices voluntarily,
before the 2020 Final Rules were adopted.\147\ We believe that
voluntarily adopted practices, as a general matter, would not have the
same adverse impact on the independence, cost, and timeliness of proxy
voting advice as mandatory measures that PVABs may implement solely to
comply with the Rule 14a-2(b)(9)(ii) conditions, as we expect that
PVABs would only implement voluntary practices to the extent that the
benefits of such practices would exceed their costs. This belief is
also consistent with the Commission's economic analysis in the 2020
Adopting Release, which noted the existence of ISS' and Glass Lewis'
voluntary practices \148\ but still projected direct and indirect costs
for PVABs as a result of the Rule 14a-2(b)(9)(ii) conditions.\149\
---------------------------------------------------------------------------
\146\ See supra note 94 and accompanying text.
\147\ See 2021 Proposing Release at 67388, nn.60-61 and
accompanying text.
\148\ 2020 Adopting Release at 55128-29.
\149\ Id. at 55136-39.
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Although some commenters expressed concern that PVABs could change
their practices to the detriment of their clients if the Rule 14a-
2(b)(9)(ii) conditions are rescinded,\150\ other commenters indicated
that there are market-based incentives for PVABs to maintain the
practices they have voluntarily adopted \151\ and that they see little
risk that PVABs will change these practices.\152\ In addition, we will
continue to monitor the PVAB market to help ensure that investors are
adequately protected and have ready access to information that allows
them to make informed voting decisions. To the extent that there are
changes in PVABs' policies and procedures or new entrants to the PVAB
market that do not adopt policies and procedures consistent with best
practices, we will reevaluate the state of the PVAB market and consider
whether to take further action.
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\150\ See supra note 95 and accompanying text.
\151\ See supra note 53 and accompanying text. Those commenters
included an institutional investor that utilizes proxy voting advice
(Ohio Public Retirement) and an organization that represents
institutional investors (CII). Id. With respect to PVABs'
incentives, we note that one commenter asserted that ``[i]f errors
[in proxy voting advice] are found, the cost of correcting those
errors creates a disincentive for [PVABs] to acknowledge them.''
Letter from CEC. We believe, however, that the perpetuation of
material errors in proxy voting advice would reduce the quality and
usefulness of such advice, which, in the long-term, would reduce a
PVAB's credibility in the market and its competitiveness. As such,
we believe that PVABs are financially motivated to address errors in
their advice.
\152\ See letters from CII; Ohio Public Retirement.
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Some commenters expressed concern that both registrants and
investors may have changed their practices in reliance on the
Commission's adoption of the 2020 Final Rules.\153\ We note, however,
that none of the commenters that raised such concerns were investors.
In addition, although some of the commenters suggested steps that
registrants may have taken in reliance on the effectiveness of the Rule
14a-2(b)(9)(ii) conditions--and one commenter that is a registrant
asserted that it has been preparing for the effectiveness of those
conditions--these commenters did not provide specific examples of
actions registrants have actually taken or costs that registrants have
actually incurred in preparation for the effectiveness of those
conditions.
---------------------------------------------------------------------------
\153\ See supra notes 68-69 and accompanying text.
---------------------------------------------------------------------------
We recognize that many registrants may have anticipated taking
advantage of the opportunities to review and respond to proxy voting
advice pursuant to the Rule 14a-2(b)(9)(ii) conditions, but commenters
did not present evidence that registrants have incurred significant
costs or significantly altered existing practices in reliance on the
conditions, nor are we aware of any information suggesting that is the
case. Moreover, we note that the Rule 14a-2(b)(9)(ii) conditions only
impose obligations on PVABs, as opposed to registrants, and that the
2020 Adopting Release contemplated that, even pursuant to the Rule 14a-
2(b)(9)(ii) conditions, registrants would respond to proxy voting
advice via existing mechanisms (i.e., a supplemental proxy filing) that
registrants have historically utilized.\154\ Nor is there any other
reason to believe that the Rule 14a-2(b)(9)(ii) conditions have
engendered significant reliance interests given that the conditions
were adopted only two years ago and took effect less than a year ago.
---------------------------------------------------------------------------
\154\ See supra note 135 and accompanying text.
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Some commenters asserted that it was inappropriate for the
Commission to propose amendments to Rule 14a-2(b)(9) before that rule
had gone into effect.\155\ To the contrary, we believe it is
appropriate to proceed expeditiously to rescind the Rule 14a-
2(b)(9)(ii) conditions rather than wait until the risks those
conditions pose materialize and investors are harmed. This belief is
animated, in large part, by (1) the important role that PVABs play in
the proxy voting process and the scope of the potential consequences
should that role be disrupted, (2) the fact that the vast majority of
PVABs' clients that
[[Page 43178]]
expressed views on the Rule 14a-2(b)(9)(ii) conditions opposed them,
and (3) our conclusion that the reliance interests implicated by
rescinding those conditions are limited, as discussed above.
---------------------------------------------------------------------------
\155\ See supra note 66 and accompanying text.
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Finally, we note that some opposing commenters also expressed
broader, policy-based concerns associated with rescinding the Rule 14a-
2(b)(9)(ii) conditions \156\ and the potential consequences that may
result from such rescission.\157\ Those commenters generally appeared
to be concerned that PVABs' advice would become largely unregulated,
especially given the important role that PVABs play in the proxy
process. However, it is important to note that, notwithstanding our
rescission of the Rule 14a-2(b)(9)(ii) conditions and our amendment to
Rule 14a-9, proxy voting advice generally will remain a
``solicitation'' under Rule 14a-1(l)(1)(iii)(A). As such, proxy voting
advice generally will remain subject to Rule 14a-9 liability, and, in
order to qualify for the exemptions set forth in Rules 14a-2(b)(1) and
(3) from the proxy rules' information and filing requirements, PVABs
will have to satisfy the conflicts of interest disclosure requirements
set forth in Rule 14a-2(b)(9).\158\
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\156\ See supra notes 100-101 and accompanying text.
\157\ See supra notes 102-105 and accompanying text.
\158\ One commenter asserted that the conflicts of interest
disclosure requirement in Rule 14a-2(b)(9) is ``hollow without
assurances that issuers and investors are protected from materially
false, inaccurate and incomplete data as a result of unchecked
critiques from proxy advisory firm.'' Letter from Natural Gas
Services. Notwithstanding our rescission of the Rule 14a-2(b)(9)(ii)
conditions, the fact that proxy voting advice generally will remain
subject to liability under Rule 14a-9 should mitigate this concern.
See infra Section II.B.
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4. 2020 Supplemental Proxy Voting Guidance
The 2021 Proposing Release requested comment on whether the
Commission should rescind or revise the Supplemental Proxy Voting
Guidance because it was prompted, in part, by the adoption of the Rule
14a-2(b)(9)(ii) conditions.\159\ The Supplemental Proxy Voting Guidance
was intended to assist investment advisers in assessing how to consider
registrant responses to proxy voting advice that may become more
readily available as a result of the 2020 Final Rules. The Supplemental
Proxy Voting Guidance also specifically addressed situations in which
advisers use a PVAB's electronic vote management system and related
disclosure obligations, as well as client consent relating to the use
of automated voting services. The Commission received several comments
on this issue,\160\ with most of those commenters recommending that the
Commission rescind the Supplemental Proxy Voting Guidance.\161\
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\159\ 2021 Proposing Release at 67388-89.
\160\ See letters from BIO; CII; Glass Lewis; IAA; ICI; ISS.
\161\ See letters from CII; Glass Lewis; IAA; ICI; ISS. These
commenters generally indicated that because the Supplemental Proxy
Voting Guidance was tied to the 2020 Final Rules, any rescission of
those rules should also include the Supplemental Proxy Voting
Guidance. Some of these commenters further stated that the
Supplemental Proxy Voting Guidance was too prescriptive for
investment advisers. See letters from IAA; Glass Lewis. Other
commenters suggested the Supplemental Proxy Voting Guidance could
contribute to uncertainty and delays in voting. See letters from
CII; IAA. Another stated the 2019 Proxy Voting Guidance provided
sufficient guidance to investment advisers on this subject. See
letter from ICI. On the other hand, one commenter recommended
retaining the Supplemental Proxy Voting Guidance on the basis that
it encouraged helpful disclosure to investors. See letter from BIO.
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We are rescinding the Supplemental Proxy Voting Guidance. While
aspects of the guidance could be relevant to investment advisers in
situations in which they become aware that a registrant that is the
subject of a voting recommendation intends to file or has filed
additional soliciting materials with the Commission setting forth the
registrant's views regarding the voting recommendation, we are mindful
of the comments received with respect to the Supplemental Proxy Voting
Guidance. Moreover, we believe that existing Commission guidance,
including the response to Question No. 2 in the 2019 Proxy Voting
Guidance, which discusses how advisers could consider policies and
procedures that provide for consideration of additional information
that may become available regarding a particular proposal, will serve
to assist investment advisers in carrying out their obligations under
rule 206(4)-6 under the Investment Advisers Act of 1940 and their
fiduciary duty in such situations.\162\ Further, an investment
adviser's fiduciary duty requires, among other things, that an adviser
conduct a reasonable investigation into an investment sufficient not to
base its advice on materially inaccurate or incomplete
information.\163\ The duty of loyalty also requires, among other
things, full and fair disclosure to clients about all material facts
relating to the advisory relationship.\164\
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\162\ Commission Guidance Regarding Proxy Voting
Responsibilities of Investment Advisers, Release Nos. IA-5325; IC-
33605 (Aug. 21, 2019) [84 FR 47420, 47424 (Sept. 10, 2019)].
\163\ Commission Interpretation Regarding Standard of Conduct
for Investment Advisers, Release No. IA-5248 (June 5, 2019) [84 FR
33669, 33674 (July 12, 2019)].
\164\ Id. at 33675.
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B. Amendment to Rule 14a-9
Before adopting the 2020 Final Rules, the Commission, in August
2019, issued an interpretation and guidance that clarified the
application of the Federal proxy rules to the provision of proxy voting
advice (the ``Interpretive Release'').\165\ In the Interpretive
Release, the Commission explained that the determination of whether a
communication is a solicitation for purposes of Section 14(a) of the
Exchange Act depends upon the specific nature, content, and timing of
the communication and the circumstances under which the communication
is transmitted.\166\ The Commission stated that PVABs' proxy voting
advice generally would constitute a solicitation subject to the proxy
rules.\167\ As a solicitation, proxy voting advice is subject to Rule
14a-9. Rule 14a-9 ``prohibits any solicitation 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.'' \168\ The rule also requires that solicitations ``must
not omit to state any material fact necessary in order to make the
statements therein not false or misleading.'' \169\ The Commission
noted that although PVABs may rely on exemptions from the proxy rules'
information and filing requirements, even these exempt solicitations
remain subject to Rule 14a-9.\170\
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\165\ Commission Interpretation and Guidance Regarding the
Applicability of the Proxy Rules to Proxy Voting Advice, Release No.
34-86721 (Aug. 21, 2019) [84 FR 47416 (Sept. 10, 2019)]
(``Interpretive Release'').
\166\ Id. at 47417-19.
\167\ Id.
\168\ Id. at 47419.
\169\ Id.
\170\ Id.
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In the 2020 Adopting Release, the Commission codified the guidance
set forth in the Interpretive Release that proxy voting advice is
generally subject to Rule 14a-9.\171\ The 2020 Final Rules amended Rule
14a-9 by adding paragraph (e) to the Note to that rule. Paragraph (e)
sets forth examples of what may, depending on the particular facts and
circumstances, be misleading within the meaning of Rule 14a-9 with
respect to proxy voting advice. Specifically, Note (e) to Rule 14a-9
provides that the failure to disclose material information regarding
proxy voting advice, ``such as the [PVAB's] methodology, sources of
information, or conflicts of interest,'' may, depending upon particular
facts and circumstances, be misleading within the meaning of the
[[Page 43179]]
rule.\172\ In adopting these amendments, the Commission noted that
``[t]he ability of a client of a [PVAB] to make voting decisions is
affected by the adequacy of the information it uses to formulate such
decisions'' and stated that the amendments ``are designed to further
clarify the potential implications of Rule 14a-9 for proxy voting
advice specifically, and to help ensure that [PVABs'] clients are
provided with the material information they need to make fully informed
decisions.'' \173\
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\171\ 2020 Adopting Release at 55121.
\172\ 17 CFR 240.14a-9, note (e).
\173\ 2020 Adopting Release at 55121.
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1. Proposed Amendment
In the 2021 Proposing Release, the Commission proposed to amend
Rule 14a-9 by deleting Note (e). The proposed amendment was intended to
address concerns by PVABs, their clients, and other investors that the
Commission's adoption of Note (e) to Rule 14a-9 had created uncertainty
regarding the application of Rule 14a-9 to proxy voting advice and that
such uncertainty unnecessarily increases the litigation risk to PVABs
and impairs the independence of the proxy voting advice that investors
use to make their voting decisions.\174\ That proposed amendment also
was intended to address any misperception that the Commission's
adoption of Note (e) purported to determine or alter the law governing
Rule 14a-9's application and scope, including its application to
statements of opinion, in order to reduce any resulting uncertainty
that could lead to increased litigation risks, or the threat of
litigation, and impaired independence of proxy voting advice.\175\
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\174\ 2021 Proposing Release at 67389-90.
\175\ Id. at 67390.
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Notwithstanding the proposed deletion of Note (e) to Rule 14a-9,
the Commission stated that PVABs ``may, depending on the facts and
circumstances, be subject to liability under Rule 14a-9 for a
materially misleading statement or omission of fact, including with
regard to its methodology, sources of information or conflicts of
interest,'' and that ``such conclusion would not be altered by virtue
of our proposed deletion of Note (e).'' \176\ The Commission also
provided a discussion regarding the application of Rule 14a-9 to proxy
voting advice, in particular with respect to a PVAB's statements of
opinion.\177\
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\176\ Id.
\177\ See id.
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2. Comments Received
Commenters expressed a range of views on the proposed amendment to
Rule 14a-9. A number of commenters supported the proposed deletion of
Note (e) to Rule 14a-9.\178\ Some of these commenters reiterated the
concerns regarding the 2020 Final Rules that prompted the Commission to
issue the 2021 Proposed Amendments, including that the threat of
litigation as a result of Note (e) would impair the independence and
decrease the quality of proxy voting advice \179\ and that heightened
legal risks as a result of Note (e) would increase compliance costs for
PVABs, which could increase the cost of proxy voting advice for their
clients.\180\ One commenter also asserted that increased costs of proxy
voting advice as a result of Note (e) could reduce some clients' use of
proxy voting advice and result in less shareholder engagement and
participation in shareholder voting and that deleting Note (e) would
provide PVABs with more legal certainty, as Note (e) has created
ambiguity as to the nature and scope of PVABs' Rule 14a-9
liability.\181\
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\178\ See letters from Alliance; Anonymous 1; Ben J.; Better
Markets; CalPERS; CII; CO Retirement; D. Jamieson; Glass Lewis; IAA;
ICGN; ISS; J. Giorgio; MFA; NASAA; New York Comptroller; Ohio Public
Retirement; RK Invest Law and ESG Legal Services; US SIF.
\179\ See letters from IAA; MFA; NASAA; New York Comptroller.
\180\ See letters from CO Retirement; MFA; New York Comptroller.
\181\ See letter from MFA.
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Further, one commenter expressed concern that the examples in Note
(e) extend beyond material, factual information and subject PVABs to
the threat of litigation in cases where registrants may disagree with
the analysis and voting recommendations regardless of whether the
advice contains factual errors.\182\ Similarly, one commenter suggested
that Note (e) could invite litigation even if proxy voting advice was
accurate on the basis that it was somehow misleading because a PVAB did
not disclose enough about its methodology, sources of information, or
conflicts of interest.\183\ Other commenters asserted that Note (e)
should be deleted because it does not appear to add anything of
interpretive significance \184\ and imposes more stringent obligations
on PVABs than registrants.\185\
---------------------------------------------------------------------------
\182\ See id.
\183\ See letter from Glass Lewis.
\184\ See letter from NASAA.
\185\ See letter from CalPERS.
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In addition to reiterating some of the concerns that prompted the
2021 Proposed Amendments, supporting commenters also critiqued the
process by which the Commission adopted Note (e). For example, as noted
earlier, some commenters asserted that the 2020 Final Rules were flawed
because they did not provide credible evidence of a market failure that
would warrant further regulation of PVABs or their advice.\186\ Another
commenter maintained that the Commission neither sufficiently explained
how the examples in Note (e) created a risk of misleading PVABs'
clients nor clarified its expectations for non-misleading
disclosure.\187\
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\186\ See letters from Better Markets; Glass Lewis; US SIF.
\187\ See letter from Glass Lewis.
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Finally, and more broadly, some commenters asserted that subjecting
PVABs to Rule 14a-9 liability unnecessarily increases PVABs' litigation
risks and could impair the independence and increase the costs of proxy
voting advice,\188\ and another commenter expressed concern regarding
the constitutionality of the 2020 Final Rules and requested that the
Commission ``fix'' those rules by adopting the 2021 Proposed
Amendments.\189\
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\188\ See letters from CII; Glass Lewis.
\189\ See letter from D. Jamieson.
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Other commenters opposed deleting Note (e).\190\ Several of those
commenters expressed process-based concerns regarding the 2021 Proposed
Amendments that were similar to those they expressed in the context of
the proposed amendments to Rule 14a-2(b)(9).\191\
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\190\ See letters from ACCF; Anonymous 2; A. Smith; BIO; BRT; B.
Zycher; CBT; CCMC I; CCMC II; E. Mills; FedEx; MasterCraft; NAM;
Nasdaq; Natural Gas Services; NIRI; Pacific Research; Prof. Verret;
Profs. Rose and Walker; Reps. Steil and Huizenga; Steve Milloy (Jan.
3, 2022) (``S. Milloy''); T. Doyle; Virtu.
\191\ See supra notes 66-70 and accompanying text.
---------------------------------------------------------------------------
Some commenters opposed deleting Note (e) based on concerns
regarding the detrimental effect that such amendment could have on
proxy voting advice. For example, some commenters stated that the
deletion of Note (e) would weaken antifraud provisions that were
intended to protect investors against PVABs' false or misleading
statements.\192\ Other commenters asserted that deleting Note (e) could
reduce transparency in the public markets \193\ and could actually lead
to increased litigation for PVABs.\194\
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\192\ See letters from ACCF; NAM; NIRI.
\193\ See letters from Nasdaq; Natural Gas Services.
\194\ See letter from T. Doyle.
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In addition, one commenter stated that Note (e) is ``critical'' to
ensuring that Rule 14a-9 fully and fairly applies to PVABs and that
they are held to comparable liability standards as other soliciting
entities.\195\ Other commenters asserted, as they did in the context of
the proposed amendments to Rule 14a-
[[Page 43180]]
2(b)(9), that the 2020 Final Rules should not be rescinded given the
continued prevalence of errors in and disagreements by registrants with
proxy voting advice, based on the ACCF study.\196\ Similarly, one
commenter cited a 2021 research paper that found that PVABs' advice
favors ESG proposals that may not necessarily be in the best economic
interests of all investors.\197\
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\195\ See letter from NAM.
\196\ See letters from ACCF; CCMC II; Natural Gas Services;
NIRI; Profs. Rose and Walker. See supra notes 80-82 and accompanying
text for a description of the ACCF study.
\197\ See letter from CCMC II.
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Other commenters disagreed with the Commission's bases for
proposing to delete Note (e). Several commenters disputed the 2021
Proposing Release's suggestion that Note (e) caused misperceptions as
to the applicability of Rule 14a-9 to proxy voting advice.\198\ Other
commenters asserted that the deletion of Note (e) will lead to more
confusion, not less, when interpreting the application of the rule to
proxy voting advice.\199\ In addition, some commenters characterized
the deletion of Note (e) as exempting PVABs from Rule 14a-9 liability
\200\ and asserted that PVABs should be held to the same standard of
liability and accountability as other similar market participants.\201\
---------------------------------------------------------------------------
\198\ See letters from NAM; Profs. Rose and Walker.
\199\ See letters from BRT; CCMC II; T. Doyle.
\200\ See letter from Profs. Rose and Walker.
\201\ See letters from BIO; NIRI.
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In addition, one commenter addressed the Commission's discussion in
the 2021 Proposing Release regarding the application of Rule 14a-9 to
proxy voting advice.\202\ The commenter expressed concern that the
Commission's discussion did not ``appreciate the wealth of conflicted
reasons why a [PVAB] may be making a recommendation,'' and stated that
a PVAB may ``be making a recommendation on the basis of little evidence
despite purporting to conduct robust analysis of the vote's impact on
shareholder returns.'' \203\ This commenter also expressed the view
that the discussion would not receive any judicial deference.\204\
---------------------------------------------------------------------------
\202\ See letter from Prof. Verret.
\203\ See id.
\204\ See id.
---------------------------------------------------------------------------
Some commenters that generally supported the proposed deletion of
Note (e) also recommended that the Commission take additional actions
to address their concerns. For example, some commenters recommended
that the Commission amend Rule 14a-9 to expressly exempt all or
portions of proxy voting advice from liability.\205\ One of those
commenters recommended that the Commission amend Rule 14a-9 to clarify
that PVABs are not liable simply because a registrant disagrees with
their subjective determinations in proxy voting advice.\206\ Other
commenters recommended that the Commission amend Rule 14a-9 to exempt
PVABs from liability for their voting recommendations, any subjective
determinations they make in formulating such recommendations, including
decisions to use a specific analysis, methodology, or information, and
their decisions regarding how to respond to registrants' disagreements
with their advice.\207\ One of those commenters stated that such an
exemption would not harm investors or the integrity of the proxy
process because PVABs are already subject to a more relevant and robust
antifraud rule under the Investment Advisers Act of 1940.\208\ Finally,
another commenter asserted that the Commission should amend Rule 14a-9
to provide PVABs with a safe harbor from private actions.\209\
---------------------------------------------------------------------------
\205\ See letters from CII; Glass Lewis; ICGN; ISS; Ohio Public
Retirement.
\206\ See letter from ICGN.
\207\ See letters from CII; ISS.
\208\ See letter from ISS.
\209\ See letter from Glass Lewis.
---------------------------------------------------------------------------
In addition, one commenter that generally supported deleting Note
(e) expressed concern that the Commission did not consider that the
drafting and distribution of proxy voting advice to clients can be part
of a PVAB's broader engagement strategy.\210\ One commenter recommended
that the Commission require registrants, rather than PVABs, to disclose
the methodologies and assumptions they use to formulate disclosures in
public filings.\211\ Another commenter recommended that if the
Commission does not at least partially exempt PVABs from Rule 14a-9
liability for their proxy voting advice, it should: (1) reaffirm its
prior statements about the ``judgmental'' nature of most corporate
governance issues \212\ and state that subjective determinations on
corporate governance issues are not subject to Rule 14a-9 liability;
and (2) clarify that when determining whether an opinion is actionable
under Rule 14a-9, it is important to consider the context in which the
statement is made.\213\
---------------------------------------------------------------------------
\210\ See letter from ICGN.
\211\ See letter from CalPERS.
\212\ See letter from Glass Lewis (citing Regulation of
Communications Among Shareholders, Release No. 34-31326 (Oct. 16,
1992) [57 FR 48276 (Oct. 22, 1992)]).
\213\ See id.
---------------------------------------------------------------------------
Finally, some of the commenters that generally opposed deleting
Note (e) also made recommendations to the Commission. Consistent with
their recommendations regarding the proposed amendments to Rule 14a-
2(b)(9), some commenters recommended that the Commission commit to a
retrospective review of the 2020 Final Rules or issue an Advanced
Notice of Proposed Rulemaking rather than adopting the 2021 Proposed
Amendments.\214\ One commenter recommended that, rather than deleting
Note (e), the Commission provide an interpretation regarding the
application of Rule 14a-9 to proxy voting advice.\215\ Other commenters
opposed any efforts to exempt all or parts of proxy voting advice from
Rule 14a-9 liability.\216\ Another commenter recommended an alternative
approach of amending Note (e) to include the Commission's view that
Rule 14a-9 liability does not extend to mere differences of opinion
regarding proxy voting advice.\217\
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\214\ See supra notes 106-107 and accompanying text.
\215\ See letter from CCMC II.
\216\ See letters from NAM; NIRI.
\217\ See letter from Nasdaq.
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3. Final Amendment
We are adopting the amendment to Rule 14a-9 as proposed.
Specifically, we are amending Rule 14a-9 to delete Note (e). We
reiterate, however, that this amendment is not intended to, and does
not, affect the scope of Rule 14a-9 or its application to proxy voting
advice, just as the adoption of Note (e) in the 2020 Final Rules was
not intended to, and did not, affect the scope of Rule 14a-9 or its
application to proxy voting advice. Thus, to the extent that a PVAB's
proxy voting advice constitutes a ``solicitation'' under Rule 14a-
1(l)(1)(iii)(A), it is subject to liability under Rule 14a-9 to the
same extent that any other solicitation is, or would have been, prior
to the 2020 Final Rules. And, like any other person that engages in a
solicitation, a PVAB may, depending on the facts and circumstances, be
subject to liability under Rule 14a-9 for a material misstatement of
fact in, or an omission of material fact from, its proxy voting advice,
including with regard to its methodology, sources of information, or
conflicts of interest.
While several commenters expressed concerns regarding the potential
impact of the deletion of Note (e),\218\ as the Commission explained in
the 2020 Adopting Release, Note (e) itself did not alter Rule 14a-9's
application or scope.\219\ Rather, Note (e) was intended to further
clarify the application of Rule
[[Page 43181]]
14a-9 to proxy voting advice by providing examples of what may,
depending on the particular facts and circumstances, be misleading
within the meaning of Rule 14a-9 with respect to proxy voting
advice.\220\ However, PVABs, their clients, and other investors have
asserted that, instead of clarifying the application of Rule 14a-9 to
proxy voting advice, Note (e) has in fact heightened legal uncertainty,
particularly with respect to PVABs' statements of opinion, and that
such uncertainty unnecessarily increases the litigation risk to PVABs
and threatens the independence of their advice.\221\
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\218\ See supra notes 192-193, 195-196, 199-201 and accompanying
text.
\219\ See 2020 Adopting Release at 55121.
\220\ See id.
\221\ See supra notes 179-180 and accompanying text; see also
2021 Proposing Release at 67389-90 & n.74.
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In retrospect, we conclude that Note (e) has created a risk of
confusion regarding the application of Rule 14a-9 to proxy voting
advice in at least two respects. First, the fact that Note (e) concerns
a particular type of solicitation--in contrast to the other paragraphs
of the note, which apply to all types of solicitations--unintentionally
could imply that proxy voting advice poses heightened concerns and
should be treated differently than other types of solicitations under
Rule 14a-9. Second, singling out a PVAB's methodology, sources of
information, and conflicts of interest as examples of material
information regarding proxy voting advice unintentionally could suggest
that PVABs have a unique obligation to disclose that information with
their advice. Note (e), however, was not intended to impose any such
affirmative requirement. Whether such information must be disclosed
depends on the same facts and circumstances-based analysis that applies
to all solicitations. Accordingly, because Note (e) appears not to have
achieved--and, instead, appears to have undermined--its stated goal, we
conclude that deleting Note (e) is appropriate.\222\
---------------------------------------------------------------------------
\222\ We disagree with those commenters who suggested that
deleting Note (e) will lead to more confusion. See supra note 199
and accompanying text. We do not believe that returning to the
status quo that existed before the addition of Note (e) will lead to
more confusion particularly in light of our repeated emphasis in
both this release and the 2021 Proposing Release that the deletion
of Note (e) will have no effect on the scope or application of Rule
14a-9.
---------------------------------------------------------------------------
Contrary to the concerns expressed by some commenters,\223\
deleting Note (e) does not in any respect weaken the application of
Rule 14a-9 to proxy voting advice or otherwise reduce antifraud
protection for investors. Proxy voting advice that falls within the
scope of Rule 14a-1(l)(1)(iii)(A) is subject to liability under Rule
14a-9(a) to the same extent as any other solicitation.\224\ Just as the
addition of Note (e) did not alter the application of Rule 14a-9 to
proxy voting advice, our deletion of it will not do so either. Thus,
any suggestion that the deletion of Note (e) would provide PVABs with
an exemption from Rule 14a-9 liability is incorrect.
---------------------------------------------------------------------------
\223\ See supra notes 192, 195, 200 and accompanying text.
\224\ The definition of ``solicitation'' is set forth in Rule
14a-1(l) and includes, in paragraph (1)(iii)(A), certain types of
proxy voting advice. 17 CFR 240.14a-1(l)(1)(iii)(A). Rule 14a-9(a),
in turn, provides that ``[n]o solicitation . . . shall be made . . .
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, or which omits to state any material
fact necessary in order to make the statements therein not false or
misleading.'' 17 CFR 240.14a-9(a).
---------------------------------------------------------------------------
As was the case both before and after Note (e) was added to Rule
14a-9, a PVAB may, depending on the particular facts and circumstances,
be subject to liability for a material misstatement in, or an omission
of material fact from, proxy voting advice covered by Rule 14a-
1(l)(1)(iii)(A), including with regard to its methodology, sources of
information, or conflicts of interest.
We recognize that PVABs, their clients, and other investors
continue to express concerns about whether Rule 14a-9 liability may
extend to mere differences of opinion regarding proxy voting advice. We
are therefore reiterating our understanding of the limited
circumstances in which a PVAB's statement of opinion may subject it to
liability under Rule 14a-9, consistent with the discussion in the 2021
Proposing Release. We recognize that the formulation of proxy voting
advice often requires subjective determinations and the exercise of
professional judgment, and we do not interpret Rule 14a-9 to subject
PVABs to liability for such determinations simply because a registrant
holds a differing view.
Our understanding that Rule 14a-9 liability does not extend to mere
differences of opinion is supported by the Supreme Court's decisions in
Omnicare, Inc. v. Laborers District Council Construction Industry
Pension Fund \225\ and Virginia Bankshares, Inc. v. Sandberg.\226\ As
noted above, Rule 14a-9 prohibits misstatements or omissions of
``material fact.'' In Omnicare, the Court explained that ``a sincere
statement of pure opinion is not an `untrue statement of material
fact''' even if the belief is wrong.\227\ Thus, to state a claim under
Rule 14a-9, it would not be enough to allege that a PVAB's opinions--
regarding, for example, its determination to select a particular
analysis or methodology to formulate its voting recommendations or the
ultimate voting recommendations themselves--were wrong.\228\
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\225\ 575 U.S. 175 (2015).
\226\ 501 U.S. 1083 (1991). While Omnicare involved claims
brought under Section 11 of the Securities Act of 1933, we believe
its discussion of the circumstances in which a statement of opinion
may be actionable under that provision applies to Rule 14a-9. See
Omnicare, 575 U.S. at 185 n.2 (noting that Rule 14a-9 ``bars conduct
similar to that described in Sec. 11''); see also, e.g., Golub v.
Gigamon, Inc., 994 F.3d 1102 (9th Cir. 2021) (holding that the
Omnicare standards apply to claims under Rule 14a-9); Paradise Wire
& Cable Defined Benefit Pension Plan v. Weil, 918 F.3d 312, 322-23
(4th Cir. 2019) (applying the Omnicare standards to claims under
Rule 14a-9).
\227\ 575 U.S. at 186.
\228\ Id. at 194.
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As the Court explained in Omnicare, there are three ways in which a
statement of opinion may be actionable as a misstatement or omission of
material fact. First, every statement of opinion ``explicitly affirms
one fact: that the speaker actually holds the stated belief.'' \229\
Thus, a PVAB may be subject to liability under Rule 14a-9 for a
statement of opinion that ``falsely describe[s]'' its view as to the
voting decision that it believes the client should make.\230\ Second, a
statement of opinion may contain ``embedded statements of fact'' which,
if untrue, may be a source of liability under Rule 14a-9.\231\ And
third, ``a reasonable investor may, depending on the circumstances,
understand an opinion statement to convey facts about how the speaker
has formed the opinion--or, otherwise put, about the speaker's basis
for holding that view.'' \232\ A PVAB's statement of opinion may thus
give rise to liability if it ``omits material facts about the [PVAB's]
inquiry into or knowledge concerning [the] statement'' and ``those
facts conflict with what a reasonable investor would take from the
statement itself.'' \233\
---------------------------------------------------------------------------
\229\ Id. at 184.
\230\ Id.; see also Virginia Bankshares, 501 U.S. at 1092, 1095.
For example, if a speaker states the belief that a company has the
highest market share, while knowing that the company in fact has the
second highest market share, that statement of belief would be an
``untrue statement of fact'' about the speaker's own belief.
\231\ Omnicare, 575 U.S. at 185-86; see also Virginia
Bankshares, 501 U.S. at 1092, 1095. For example, in stating its
opinion that shareholders should vote for a particular director-
candidate, a PVAB may support that opinion by reference to that
candidate's prior professional experience. Those descriptions of the
candidate's professional experience would be statements of fact
potentially subject to liability under Rule 14a-9, notwithstanding
the context in which they were made (i.e., as support for a
statement of opinion).
\232\ Omnicare, 575 U.S. at 188.
\233\ Id. at 189. In Omnicare, the court offered the example of
``an unadorned statement of opinion about legal compliance: `We
believe our conduct is lawful.''' Id. at 188. The court noted that
``[i]f the issuer makes that statement without having consulted a
lawyer, it could be misleadingly incomplete.'' Id. This example can
also be applied to a PVAB's proxy voting advice if, for example, it
makes a statement of opinion regarding the legality of a
registrant's proposal or corporate action without having consulted a
lawyer.
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[[Page 43182]]
Omnicare and Virginia Bankshares support our view that neither mere
disagreement with a PVAB's analysis, methodology, or opinions, nor a
bare assertion that a PVAB failed to reveal the basis for its
conclusions, would suffice to state a claim under Rule 14a-9. Rather, a
litigant ``must identify particular (and material) facts'' indicating a
misstatement or omission of a material fact that renders a PVAB's
statements misleading in one of the three senses above--which, the
Supreme Court noted, is ``no small task.'' \234\ As such, a PVAB would
not face liability under Rule 14a-9 for exercising its discretion to
rely on a particular analysis, methodology, or set of information--
while relying less heavily on or not adopting alternative analyses,
methodologies, or sets of information, including those advanced by a
registrant or other party--when formulating its voting recommendations.
Similarly, a PVAB would not face liability under Rule 14a-9, for
example, simply because it did not accept a registrant's suggested
revisions to its proxy voting advice concerning such discretionary
matters. Instead, a PVAB's potential liability under Rule 14a-9 \235\
turns on whether its proxy voting advice contains a material
misstatement or omission of fact.\236\
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\234\ Id. at 194. We further note that both Omnicare and
Virginia Bankshares were cases against registrants; we are not aware
of any enforcement actions or private lawsuits against a PVAB based
on statements of opinion in connection with proxy voting matters.
\235\ This release does not address any duties or liabilities
that a PVAB may have under the Investment Advisers Act of 1940, as
applicable.
\236\ Several commenters expressed concern that a statement in
the Interpretive Release suggests a PVAB may be subject to liability
under Rule 14a-9 for its ``opinions, reasons, recommendations or
beliefs'' even in the absence of a misstatement or omission of
material fact. See letters from Glass Lewis; ISS. That is not the
case. Rather, the Commission noted, citing Virginia Bankshares, that
``Rule 14a-9 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.''
Interpretive Release at 47419 & n.31 (emphasis added). That
statement is consistent with, and was merely intended to reflect,
the case law summarized above regarding the limited circumstances in
which a statement of opinion may be actionable under Rule 14a-9 as a
misstatement or omission of material fact.
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One commenter asserted that the Commission's discussion in the 2021
Proposing Release ``fails to appreciate that any statements of opinion
by [PVABs] must be considered as a part of the total mix of information
being provided by [PVABs] as to how their opinions are generated'' and
that ``[a]ny statement of opinion by a [PVAB] will carry with it the
implicit representation that the opinion was generated using the robust
methodologies otherwise described by [PVABs], and the implicit
representation that the [PVAB's] opinion is not the result of a
conflict of interest.'' \237\ However, Omnicare and Virginia Bankshares
recognize that statements of opinion can, in some circumstances, carry
such implicit factual representations as to the basis for the opinion.
Further, we do not believe that the commenter has offered any basis to
conclude that the principles set forth in those cases should or would
apply differently to proxy voting advice.
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\237\ See letter from Prof. Verret.
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The same commenter also asserted that the discussion in the 2021
Proposing Release will not receive judicial deference.\238\ That
assertion misunderstands the purpose of that discussion, which is to
summarize our understanding of the applicable case law to help clarify
for market participants the limited circumstances in which a PVAB's
statement of opinion may be subject to liability under Rule 14a-9. To
the extent this discussion does provide such clarity, we believe it may
help mitigate the concerns regarding uncertainty as to the application
of Rule 14a-9 to PVABs' statements of opinion that could impair the
independence of their proxy voting advice.
---------------------------------------------------------------------------
\238\ Id.
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In addition, while one commenter recommended that, rather than
delete Note (e), we should amend it to include our view that Rule 14a-9
liability does not extend to mere differences of opinion regarding
proxy voting advice,\239\ we decline to do so. Amending Note (e) as
that commenter suggested would not address our reasons for deleting it.
For example, even with the commenter's suggested change, Note (e) would
continue to raise a risk of confusion regarding the application of Rule
14a-9 to proxy voting advice because it would continue to single out
proxy voting advice and its methodology, its sources of information,
and any conflicts of interest.
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\239\ See supra note 217 and accompanying text.
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Although some commenters that generally supported the 2021 Proposed
Amendments recommended that we exempt all or portions of proxy voting
advice from Rule 14a-9 liability,\240\ we are not doing so. We believe
that the law we have summarized above regarding the application of Rule
14a-9 to statements of opinion adequately addresses the concerns that
PVABs, their clients, and others have expressed regarding the potential
for perceived litigation risks to impair the independence of proxy
voting advice, particularly in conjunction with our deletion of Note
(e). Exempting all or parts of proxy voting advice from Rule 14a-9
liability entirely could eliminate liability even in the narrow
circumstances considered in Omnicare and Virginia Bankshares, in which
statements of opinion in such advice contain a material misstatement or
omission. We believe that it is appropriate to continue to subject
proxy voting advice to Rule 14a-9 liability for material misstatements
or omissions to help ensure that PVABs' clients are provided with the
information they need to make fully informed voting decisions and to
mitigate some of the concerns that opposing commenters raised in their
comment letters.\241\
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\240\ See supra notes 205-209 and accompanying text.
\241\ See, e.g., supra notes 102-105 and accompanying text
(expressing concern that, without the Rule 14a-2(b)(9)(ii)
conditions, PVABs will be exempt from the proxy rules' information
and filing requirements without sufficient alternative investor
protection mechanisms, the transparency of proxy voting advice could
suffer, and the conflicts of interest disclosure requirement in Rule
14a-2(b)(9)(i) will be hollow); supra notes 192-193 and accompanying
text (expressing concern that the deletion of Note (e) will weaken
antifraud provisions that were intended to protect investors against
PVABs' false or misleading statements and reduce transparency in the
public markets); supra note 196 and accompanying text (expressing
concern regarding the prevalence of errors in proxy voting advice);
supra note 216 and accompanying text (expressing concern about any
efforts to exempt all or parts of proxy voting advice from Rule 14a-
9 liability).
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Finally, we note that several commenters expressed similar process-
based concerns regarding the proposed deletion of Note (e) as they
expressed with respect to the proposed amendments to Rule 14a-
2(b)(9).\242\ However, for the reasons discussed in Section II.A.3 and
above, we believe that deleting Note (e) is appropriate.\243\
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\242\ See supra note 191 and accompanying text.
\243\ See supra note 155 and accompanying text. Further, the
timing-based concerns that opposing commenters expressed with
respect to the 2021 Proposed Amendments are less relevant with
respect to Note (e) given that Note (e) became effective on Nov. 2,
2020, before we issued the 2021 Proposed Amendments. 2020 Adopting
Release at 55082, 55122.
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III. Other Matters
If any of the provisions of these amendments, or the application
thereof to any person or circumstance, is held
[[Page 43183]]
to be invalid, such invalidity shall not affect other provisions or the
application of such provisions to other persons or circumstances that
can be given effect without the invalid provision or application. In
particular, the amendments to Rule 14a-2(b)(9) operate independently
from the amendments to Rule 14a-9.
Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated these amendments a ``major
rule,'' as defined by 5 U.S.C. 804(2).
IV. Economic Analysis
As discussed above, the purpose of these amendments is to avoid
burdens on PVABs that may impede and impair the timeliness and
independence of proxy voting advice and avoid misperceptions regarding
the application of Rule 14a-9 liability to proxy voting advice, while
also preserving investors' confidence in the integrity of such advice.
Specifically, we are amending Rule 14a-2(b)(9) to rescind the Rule 14a-
2(b)(9)(ii) conditions (as well as the related safe harbors and
exclusions set forth in Rules 14a-2(b)(9)(iii) through (vi)) to address
the risks that these conditions pose to the cost, timeliness, and
independence of proxy voting advice on which many investors rely. We
also are amending Rule 14a-9 to delete paragraph (e) of the Note to
that rule because Note (e) appears not to have achieved--and, instead,
appears to have undermined--its stated goal.
The discussion below addresses the economic effects of the
amendments, including their anticipated costs and benefits, as well as
the likely effects of the amendments on efficiency, competition and
capital formation.\244\ We also analyze the potential costs and
benefits of reasonable alternatives to these amendments. Where
practicable, we have attempted to quantify the economic effects of the
amendments; however, in most cases, we are unable to do so because
either the necessary data is unavailable or certain effects are not
quantifiable.
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\244\ Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)]
directs the Commission, when engaging in rulemaking where it is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. Further, Section 23(a)(2) of the
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission when
making rules under the Exchange Act, to consider the impact that the
rules would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the
Exchange Act.
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A. Economic Baseline
The baseline against which the costs, benefits, and the impact on
efficiency, competition, and capital formation of the amendments are
measured consists of the current regulatory requirements applicable to
registrants, PVABs, investment advisers, and other clients of PVABs, as
well as current industry practices used by these entities in connection
with the preparation, distribution, and use of proxy voting advice.
The 2020 Adopting Release provided an overview of the role of PVABs
in the proxy process, including a discussion of existing economic
research on PVABs and the nature of proxy voting advice they
provide.\245\
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\245\ See 2020 Adopting Release at 55122-32.
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1. Affected Parties and Current Market Practices
a. Proxy Voting Advice Businesses
As of November 2021, the proxy voting advice industry in the United
States consists of three major firms: ISS, Glass Lewis, and Egan-Jones.
<bullet> ISS, founded in 1985, is a privately held company that
provides research and analysis of proxy issues, custom policy
implementation, vote recommendations, vote execution, governance data,
and related products and services.\246\ ISS also provides advisory/
consulting services, analytical tools, and other products and services
to corporate registrants through ISS Corporate Solutions, Inc. (a
wholly owned subsidiary).\247\ As of May 2022, ISS had nearly 2,600
employees in 29 locations, and covers approximately 48,000 shareholder
meetings in 115 countries, annually.\248\ ISS states that it executes
more than 12.8 million ballots annually on behalf of its clients
representing 5.4 trillion shares.\249\ ISS is registered with the
Commission as an investment adviser and identifies itself as a pension
consultant providing advice to plans with more than $200 million as the
basis for registering as an adviser.\250\
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\246\ See U.S. Gov't Accountability Office, GAO-17-47, Report to
the Chairman, Subcommittee on Economic Policy, Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, Corporate Shareholder
Meetings: Proxy Advisory Firms' Role in Voting and Corporate
Governance Practices, 6 (2016), available at <a href="https://www.gao.gov/assets/690/681050.pdf">https://www.gao.gov/assets/690/681050.pdf</a> (``2016 GAO Report'').
\247\ Id.
\248\ See ISS, About ISS, available at <a href="https://www.issgovernance.com/about/about-iss">https://www.issgovernance.com/about/about-iss</a>.
\249\ See id.
\250\ See ISS, Form ADV (Mar. 31, 2022), available at <a href="https://reports.adviserinfo.sec.gov/reports/ADV/111940/PDF/111940.pdf">https://reports.adviserinfo.sec.gov/reports/ADV/111940/PDF/111940.pdf</a> (``ISS
Form ADV filing''); see also 2016 GAO Report, supra note 246, at 9.
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<bullet> Glass Lewis, established in 2003, is a privately held
company that provides research and analysis of proxy issues, custom
policy implementation, vote recommendations, vote execution, and
reporting and regulatory disclosure services to institutional
investors.\251\ As of May 2022, Glass Lewis had more than 380 employees
worldwide that provide services to more than 1,300 clients that
collectively manage more than $40 trillion in assets.\252\ Glass Lewis
states that it covers more than 30,000 shareholder meetings across
approximately 100 global markets annually.\253\ Glass Lewis is not
registered with the Commission in any capacity.
---------------------------------------------------------------------------
\251\ 2016 GAO Report, supra note 246, at 7.
\252\ See Glass Lewis, Company Overview, available at <a href="https://www.glasslewis.com/company-overview/">https://www.glasslewis.com/company-overview/</a>.
\253\ Id.
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<bullet> Egan-Jones was established in 2002 as a division of Egan-
Jones Ratings Company.\254\ Egan-Jones is a privately held company that
provides proxy services, such as notification of meetings, research,
and recommendations on selected matters to be voted on, voting
guidelines, execution of votes, and regulatory disclosure.\255\ As of
September 2016, Egan-Jones' proxy research or voting clients mostly
consisted of mid- to large-sized mutual funds,\256\ and the firm
covered approximately 40,000 companies.\257\ Egan-Jones Ratings Company
(Egan-Jones' parent company) is registered with the Commission as a
Nationally Recognized Statistical Ratings Organization.\258\
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\254\ See 2016 GAO Report, supra note 246, at 7.
\255\ Id.
\256\ Id.
\257\ Id. While ISS and Glass Lewis have published updated
coverage statistics on their websites, the most recent data
available for Egan-Jones was compiled in the 2016 GAO Report.
\258\ See Order Granting Registration of Egan-Jones Rating
Company as a Nationally Recognized Statistical Rating Organization,
Exchange Act Release No. 34-57031 (Dec. 21, 2007), available at
<a href="https://www.sec.gov/ocr/ocr-current-nrsros.html#egan-jones">https://www.sec.gov/ocr/ocr-current-nrsros.html#egan-jones</a>.
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Of these PVABs, ISS and Glass Lewis are the largest and most often
used for proxy voting advice.\259\ We do not have
[[Page 43184]]
access to general financial information for ISS, Glass Lewis, or Egan-
Jones such as annual revenues, earnings before interest, taxes,
depreciation and amortization, and net income. We also do not have
access to client-specific financial information or more general or
aggregate information regarding the economics of the PVAB industry.
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\259\ See 2016 GAO Report, supra note 246, at 8, 41 (``In some
instances, we focused our review on Institutional Shareholder
Services (ISS) and Glass Lewis and Co. (Glass Lewis), because they
have the largest number of clients in the proxy advisory firm market
in the United States.''). See also letters in response to the SEC
Staff Roundtable on the Proxy Process from Center on Executive
Compensation (Mar. 7, 2019) (noting that there are ``two firms
controlling roughly 97% of the market share for such services'');
Society for Corporate Governance (Nov. 9, 2018) (``While there are
five primary proxy advisory firms in the U.S., today the market is
essentially a duopoly consisting of Institutional Shareholder
Services . . . and Glass Lewis & Co. . . . .'').
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As part of our consideration of the baseline for the amendments, we
focus on the industry practice that is particularly relevant for the
amendments to Rule 14a-2(b)(9): PVABs' procedures for engaging with
registrants. As mentioned above and in the 2021 Proposing Release,\260\
all three major PVABs have certain policies, procedures, and
disclosures in place intended to provide assurances to clients about
the information used to formulate the proxy voting advice they
receive.\261\ In some cases, PVABs seek input from registrants to
further these objectives. Glass Lewis and Egan-Jones offer registrants
some form of pre-release review of at least some of their proxy voting
advice reports, or the data used in their reports. ISS does not provide
draft proxy voting advice to any United States registrants, but it
engages with registrants during the process of formulating its proxy
voting advice. All three PVABs also offer registrants access to proxy
voting advice after it is distributed to clients, in some cases for a
fee, and offer mechanisms by which registrants can provide feedback on
such advice. Finally, the 2021 Annual Report of the Independent
Oversight Committee (the ``Oversight Committee'') of the Best Practice
Principles Group (the ``BPPG''), an industry group composed of six
PVABs that includes ISS and Glass Lewis,\262\ found that all member
firms met the standards established in the BPPG's three Best Practices
Principles for Providers of Shareholder Voting Research and
Analysis,\263\ which include communication with and feedback from
registrants.\264\ The Oversight Committee--which is composed of non-
PVAB stakeholders in proxy voting advice, including representatives
from the institutional investor, registrant, and academic communities--
is responsible for reviewing the BPPG member-PVABs' compliance with the
principles. This report did not include Egan-Jones because it is not a
member of the BPPG.
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\260\ See 2021 Proposing Release at 67386-87.
\261\ See id.
\262\ The BPPG was formed in 2013 after the European Securities
and Markets Authority requested that PVABs engage in a coordinated
effort to develop an industry-wide code of conduct focusing on
enhancing transparency and disclosure. See Best Practice Principles
Oversight Committee, Annual Report 2021 at 7 (July 1, 2021),
available at <a href="https://bppgrp.info/wp-content/uploads/2021/07/2021-AR-Independent-Oversight-Committee-for-The-BPP-Group-1.pdf">https://bppgrp.info/wp-content/uploads/2021/07/2021-AR-Independent-Oversight-Committee-for-The-BPP-Group-1.pdf</a> (``2021
Annual Report''). Its six member-PVABs are Glass Lewis, ISS,
Minerva, PIRC, Proxinvest, and EOS at Federated Hermes. Id.
\263\ See Stephen Davis, First Independent Report on Proxy
Voting Advisory Firm Best Practices (July 14, 2021), available at
<a href="https://corpgov.law.harvard.edu/2021/07/14/first-independent-report-on-proxy-voting-advisory-firm-best-practices/">https://corpgov.law.harvard.edu/2021/07/14/first-independent-report-on-proxy-voting-advisory-firm-best-practices/</a>; see also 2021 Annual
Report, supra note 262.
\264\ The three principles are (1) service quality; (2)
conflicts-of-interest avoidance or management; and (3)
communications policy. See 2021 Annual Report, supra note 262, at
33-34.
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Additionally, it is our understanding that some PVABs currently
provide their clients with notifications of and links to filings by
registrants that are the subject of proxy voting advice in their online
platforms.\265\ These notifications and links provide a means for
clients to access additional definitive proxy materials that
registrants may file in response to proxy voting advice.
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\265\ 2021 Proposing Release at 67388, n.57.
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b. Clients of Proxy Voting Advice Businesses and Underlying Investors
Clients that use PVABs for proxy voting advice will be affected by
the amendments. In turn, investors and other groups on whose behalf
these clients make voting determinations will be affected. One of the
three major PVABs--ISS--is registered with the Commission as an
investment adviser and, as such, provides annually updated disclosure
with respect to its types of clients on Form ADV. Table 1 below reports
client types as disclosed by ISS.\266\
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\266\ See ISS Form ADV filing (describing clients classified as
``Other'' as ``Academic, vendor, other companies not able to
identify as above'').
Table 1--Number of Clients by Client Type
[As of March 31, 2022]
------------------------------------------------------------------------
Number of
Type of client \a\ clients
\b\
------------------------------------------------------------------------
Banking or thrift institutions.............................. 193
Pooled investment vehicles.................................. 317
Investment companies........................................ 37
Pension and profit sharing plans............................ 173
Charitable organizations.................................... 48
State or municipal government entities...................... 14
Other investment advisers................................... 1030
Insurance companies......................................... 53
Sovereign wealth funds and foreign official institutions.... 11
Corporations or other businesses not listed above........... 79
Other....................................................... 291
-----------
Total..................................................... 2,246
------------------------------------------------------------------------
\a\ The table excludes client types for which ISS indicated either zero
clients or fewer than five clients.
\b\ Form ADV filers indicate the approximate number of clients
attributable to each type of client. If the filer has fewer than five
clients in a particular category (other than investment companies,
business development companies, and pooled investment vehicles), it
may indicate that it has fewer than five clients rather than reporting
the number of clients.
Table 1 illustrates the types of clients that utilize the services
of one of the largest PVABs. For example, while investment advisers
(``Other investment advisers'' in Table 1) constitute a 46 percent
plurality of clients for ISS, other types of clients include pooled
investment vehicles (14 percent) and pension and profit sharing plans
(eight percent). Other clients include corporations, charitable
organizations, and insurance companies.\267\ Certain of these clients,
such as pension plans, make voting determinations that affect the
interests of a wide array of individual investors, beneficiaries, and
other constituents.
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\267\ Id.
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c. Registrants
The amendments also will affect registrants that have a class of
equity securities registered under Section 12 of the Exchange Act and
non-registrant parties that conduct proxy solicitations with respect to
those registrants.\268\ In addition, there are certain other companies
that do not have a class of equity securities registered under Section
12 of the Exchange Act that file proxy materials with the Commission.
Finally, Rule 20a-1 under the Investment Company Act subjects all
registered management investment companies to the Federal proxy
rules.\269\
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\268\ Foreign private registrants are exempt from the Federal
proxy rules under Rule 3a12-3(b) of the Exchange Act. See 17 CFR
240.3a12-3. Furthermore, we are not aware of any asset-backed
registrants that have a class of equity securities registered under
Section 12 of the Exchange Act. Most asset-backed registrants are
registered under Section 15(d) of the Exchange Act and thus are not
subject to the Federal proxy rules. 23 asset-backed registrants
obtained a class of debt securities registered under Section 12 of
the Exchange Act as of December 2021. As a result, these asset-
backed registrants are not subject to the Federal proxy rules.
\269\ Under Rule 20a-1 of the Investment Company Act, registered
management investment companies must comply with regulations adopted
pursuant to Section 14(a) of the Exchange Act that would be
applicable to a proxy solicitation if it were made with respect to a
security registered pursuant to Section 12 of the Exchange Act. See
17 CFR 270.20a-1. Additionally, ``registered management investment
company'' means any investment company other than a face-amount
certificate company or a unit investment trust. See 15 U.S.C. 80a-4.
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[[Page 43185]]
We note that because registrants are owned by investors, effects on
registrants as a result of the amendments will accrue to investors.
Among the investors in a given registrant, there may be individual
investors or groups of investors that may want to influence the
direction that the registrant should pursue. Those individual investors
or groups of investors could be clients of PVABs. Separately, given the
principal-agent relationship between shareholders and management of a
corporation, there may exist conflicts between management of the
registrant and investors. Some investors therefore may use PVABs'
advice as part of their decision-making process on a particular matter
presented for shareholder approval for which management's interests may
not be aligned with those of investors in general.
We estimate that, as of December 31, 2021, the amendments may
affect approximately 18,400 entities. Specifically, there were
approximately 5,800 registrants with a class of securities registered
under Section 12 of the Exchange Act \270\ and approximately 30
companies without a class of securities registered under Section 12 of
the Exchange Act that filed proxy materials.\271\ In addition, there
were 12,445 registered management investment companies that were
subject to the proxy rules: (i) 11,780 open-end funds, out of which
2,398 were Exchange Traded Funds (``ETFs'') registered as open-end
funds or open-end funds that had an ETF share class; (ii) 651 closed-
end funds; and (iii) 14 variable annuity separate accounts registered
as management investment companies.\272\ We also identified 98 Business
Development Companies (``BDCs'') that could be subject to the
amendments.\273\
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\270\ We estimated the number of registrants with a class of
securities registered under Section 12 of the Exchange Act by
reviewing all Forms 10-K and 10-K/A filed during calendar year 2021
with the Commission. After reviewing these forms, we then counted
the number of unique registrants that identify themselves as having
a class of securities registered under Section 12(b) or Section
12(g) of the Exchange Act. This estimate excludes: (1) foreign
private issuers that filed both Forms 20-F and 40-F; (2) asset-
backed registrants that filed Forms 10-D and 10-D/A; and (3) BDCs
that filed Form 10-K or an amendment during calendar year 2021 with
the Commission.
\271\ We identified these issuers as those that: (1) are subject
to the reporting obligations of Exchange Act Section 15(d), but do
not have a class of equity securities registered under Exchange Act
Section 12(b) or 12(g); and (2) have filed any proxy materials
during calendar year 2021 with the Commission. To identify
registrants reporting pursuant to Section 15(d) but not registered
under Section 12(b) or Section 12(g), we reviewed all Forms 10-K
filed in calendar year 2020 with the Commission. We then counted the
number of unique registrants that identified themselves as subject
to Section 15(d) reporting obligations with no class of equity
securities registered under Section 12(b) or Section 12(g).
\272\ We estimated the number of unique registered management
investment companies based on Forms N-CEN filed between Dec. 2020
and Dec. 2021 with the Commission. Open-end funds are registered on
Form N-1A, while closed-end funds are registered on Form N-2.
Variable annuity separate accounts registered as management
investment companies are trusts registered on Form N-3.
\273\ Business development companies are a category of closed-
end investment company that are not registered under the Investment
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64] and have been
issued an 814-reporting number. Our estimate includes 82 BDCs that
filed a Form 10-K in 2021, as well as 16 BDCs that were not traded.
---------------------------------------------------------------------------
These estimates are an upper bound of the number of potentially
affected companies because not all of these registrants may file proxy
materials related to a meeting for which a PVAB issues proxy voting
advice in a given year. Out of the approximately 18,300 potentially
affected registrants, approximately 5,565 registrants filed proxy
materials with the Commission during calendar year 2021.\274\ Out of
the 5,565 registrants, 4,621 of these registrants (83 percent) were
Section 12 or Section 15(d) registrants and the remaining 944
registrants (17 percent) were registered management investment
companies.
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\274\ We considered the following proxy materials in our
analysis: DEF14A; DEF14C; DEFA14A; DEFC14A; DEFM14A; DEFM14C;
DEFR14A; DEFR14C; DFAN14A; N-14; PRE 14A; PRE 14C; PREC14A; PREM14A;
PREM14C; PRER14A; PRER14C. Form N-14 can be a registration statement
and/or proxy statement. We also manually reviewed all Forms N-14
filed during calendar year 2021 with the Commission, excluding any
Forms N-14 that are exclusively registration statements from our
estimates.
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2. Current Regulatory Framework
On July 22, 2020, the Commission adopted the 2020 Final Rules. The
2020 Final Rules:
<bullet> Amended Rule 14a-1(l) to codify the Commission's
interpretation that proxy voting advice generally constitutes a
``solicitation'' subject to the proxy rules.
<bullet> Adopted Rule 14a-2(b)(9) to add new conditions to two
exemptions (set forth in Rules 14a-2(b)(1) and (3)) that PVABs
generally rely on to avoid the proxy rules' information and filing
requirements. Those conditions include:
[cir] New conflicts of interest disclosure requirements; and
[cir] The Rule 14a-2(b)(9)(ii) conditions.
<bullet> Amended the Note to Rule 14a-9, which prohibits false or
misleading statements, to include specific examples of material
misstatements or omissions related to proxy voting advice.
Specifically, Note (e) provides that the failure to disclose material
information regarding proxy voting advice, ``such as the [PVAB's]
methodology, sources of information, or conflicts of interest'' could,
depending upon particular facts and circumstances, be misleading within
the meaning of the rule.
The changes to the definition of ``solicitation'' and to Rule 14a-9
became effective on November 2, 2020. The conditions set forth in Rule
14a-2(b)(9) became effective on December 1, 2021. On June 1, 2021, the
Division of Corporation Finance issued a statement that it would not
recommend enforcement action based on the Interpretive Release or the
2020 Final Rules during the period in which the Commission is
considering further regulatory action in this area. This staff
statement did not alter the compliance date for the Rule 14a-
2(b)(9)(ii) conditions.
B. Benefits and Costs
In the following sections, we discuss the economic effects of the
amendments in terms of the specific benefits and costs of the final
amendments.
Several commenters raised broader concerns with how the Commission
conducted its economic analysis in the 2021 Proposing Release. One
commenter asserted the Commission did not conduct appropriate due
diligence in issuing the 2021 Proposing Release and instead relied
solely on statements made by market participants in private
meetings.\275\ This commenter also contended that, because the
Commission did not ``possess any financial or cost information to
support'' its economic analysis, the Commission ``lacks evidence to
support the fundamental assumptions that underpin the Proposed Rule.''
\276\ We rely on a number of sources of information to inform our
economic analysis, including publicly available data. And our decision
to adopt the amendments does not rest on any statements made by market
participants in private meetings. Moreover, for reasons the Commission
explained at the time, the analysis of the economic effects of adopting
Rule 14a-2(b)(9)(ii) was primarily qualitative in nature. In the 2021
Proposing Release, and for the same reasons, the Commission provided a
qualitative discussion of the economic effects of rescinding the Rule
14a-2(b)(9)(ii) conditions. The Commission noted
[[Page 43186]]
where it lacked data and solicited feedback and additional data from
commenters. Having not received information or data that would permit a
quantitative analysis, we again engage in a qualitative analysis of the
costs and benefits of rescinding the conditions.
---------------------------------------------------------------------------
\275\ See letter from BIO.
\276\ Id.
---------------------------------------------------------------------------
Another commenter expressed concern that the economic analysis in
the 2021 Proposing Release ``makes passing reference to impacts on
issuers and investors'' and ``focused almost entirely on the costs
borne and benefits received by the PVABs.'' \277\ We disagree, however,
as, both in the 2021 Proposing Release and in our discussion below, we
have substantively discussed and weighed the potential effects of the
amendments on both registrants and investors, such as the potential
impact of the rescission of the notice requirement on registrants.
---------------------------------------------------------------------------
\277\ See letter from CCMC II.
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1. Benefits
In this section, we discuss benefits of the amendments that accrue
to PVABs, their clients, registrants, and investors. The main benefit
for PVABs from our rescission of the Rule 14a-2(b)(9)(ii) conditions
would be the reduction of any initial or ongoing \278\ direct costs
associated with modifying their current systems and methods, or
developing and maintaining new systems and methods. Those costs have
been and/or will be incurred to satisfy the requirement of Rule 14a-
2(b)(9)(ii)(A) that PVABs adopt and publicly disclose written policies
and procedures reasonably designed to ensure that registrants that are
the subject of proxy voting advice have such advice made available to
them at or prior to the time when such advice is disseminated to PVABs'
clients. Additionally, the amendments will reduce the direct costs of
satisfying the requirement of Rule 14a-2(b)(9)(ii)(B) that PVABs adopt
and publicly disclose written policies and procedures reasonably
designed to ensure that PVABs provide clients with a mechanism by which
they can reasonably be expected to become aware of a registrant's
written statements about the proxy voting advice in a timely manner
before the shareholder meeting or, if no meeting, before the votes,
consents, or authorizations may be used to effect the proposed action.
Under the safe harbor in Rule 14a-2(b)(9)(iv), a PVAB could satisfy
this requirement by providing notice to its clients that the registrant
has filed or has informed the PVAB that it intends to file additional
soliciting materials and include an active hyperlink to those materials
on EDGAR when available either: (i) on its electronic client platform;
or (ii) through email or other electronic means. Both mechanisms for
informing clients could involve initial set-up costs as well as ongoing
costs.
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\278\ The compliance date for the Rule 14a-2(b)(9)(ii)
conditions was Dec. 1, 2021. On June 1, 2021, the Division of
Corporation Finance issued a statement that it would not recommend
enforcement action based on the Interpretive Release or the 2020
Final Rules during the period in which the Commission is considering
further regulatory action in this area. Division of Corporation
Finance, Statement on Compliance with the Commission's 2019
Interpretation and Guidance Regarding the Applicability of the Proxy
Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b),
14a-9, U.S. Securities and Exchange Commission, available at <a href="https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01">https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01</a>.
This staff statement did not alter the Dec. 1, 2021 compliance date
for the Rule 14a-2(b)(9)(ii) conditions, and thus we recognize that
PVABs may have already incurred certain costs to modify their
systems or otherwise ensure that the conditions of the exemption are
met. Even so, the elimination of these conditions will eliminate any
ongoing costs or other costs of the conditions that have not yet
been incurred. To the extent a PVAB has not yet incurred any direct
costs from the Rule 14a-2(b)(9)(ii) conditions, the amendments will
eliminate or avoid potential future costs.
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One commenter asserted that it is speculative to assume that PVABs
would realize cost savings as a result of the proposed amendments.\279\
According to this commenter, because PVABs have voluntarily adopted
practices regarding registrant interaction, they likely have already
absorbed any such costs. The same commenter also expressed concern that
the Commission could not quantify these costs. We acknowledge, as the
Commission did in the 2021 Proposing Release, that any benefits from
the amendments in the form of savings in initial set-up costs may be
limited to the extent that PVABs either already had similar systems in
place to meet the requirements of the Rules 14a-2(b)(9)(ii) conditions
or have made changes to come into compliance with those
conditions.\280\ Similarly, ongoing cost savings may be limited to the
extent PVABs retain similar systems. We also acknowledge that we are
unable to quantify the full range of PVABs' costs resulting from the
2020 Final Rules, which would vary depending on each PVAB's current
practices and how they implement the new conditions.\281\ In the 2020
Adopting Release, for purposes of the Paperwork Reduction Act of 1995
(``PRA''),\282\ the Commission estimated that each PVAB would incur
2,845 burden hours to satisfy Rule 14a-2(b)(9)(ii)(A) and 2,845 burden
hours to satisfy Rule 14a-2(b)(9)(ii)(B).\283\ The Commission also
estimated that each PVAB would incur a burden of between 50 and 5,690
hours per year associated with securing an acknowledgment or other
assurance that the proxy voting advice would not be disclosed.\284\ We
believe that the amendments will, at a minimum, eliminate these
estimated PRA burdens, which took into consideration that some PVABs
may have systems and practices in place that could substantially
mitigate any overall burden increases.
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\279\ See letter from BIO.
\280\ See 2021 Proposing Release at 67386-87.
\281\ While some commenters on the 2021 Proposed Rules provided
cost estimates (e.g., letter from ISS), we do not find those
estimates persuasive because they were based on the 2019 Proposed
Rules, which were different than the 2020 Final Rules.
\282\ 44 U.S.C. 3501 et seq.
\283\ See 2020 Adopting Release at Section V.B.1.
\284\ See id.
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While there could be various ways a PVAB could comply with the Rule
14a-2(b)(9)(ii) conditions currently, to rely on the safe harbor in
Rule 14a-2(b)(9)(iii), a PVAB must provide registrants with a copy of
the proxy voting advice at no charge. By eliminating the Rule 14a-
2(b)(9)(ii) conditions (and, by extension, the Rule 14a-2(b)(9)(iii)
safe harbor), the amendments could lead to an increase in PVABs
choosing to charge registrants for access to their proxy voting advice,
potentially leading to increased revenues for PVABs.
Some commenters expressed concern that the Commission's discussion
of the benefits and costs of the proposed amendments focused primarily
on the impact on PVABs, ignoring the impact of the amendments on the
market more broadly.\285\ Contrary to the commenter's suggestion, we
have considered the impact of the amendments on other parties,
including registrants and investors generally.\286\ For example, below,
we discuss the potential effects of the amendments on registrants,
clients of PVABs, and the investors whose interests these clients
represent.
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\285\ See letters from CCMC II; Prof. Verret.
\286\ See infra Section IV.B.2.
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The amendments may also benefit other parties. PVABs may pass
through a portion of the costs of modifying, developing, or maintaining
systems to satisfy the Rule 14a-2(b)(9)(ii) conditions to their clients
through higher fees for proxy voting advice. To the extent that
rescinding the Rule 14a-2(b)(9)(ii) conditions also eliminates such
costs, the cost savings could be passed on to, and therefore could
benefit, clients of PVABs. One commenter, however, stated that it is
speculative to assume that PVABs' costs would be passed on to clients
given the duopolistic nature of the PVAB market.\287\
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\287\ See letter from BIO.
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[[Page 43187]]
PVABs, their clients, and investors in general could also benefit
to the extent that the final amendments eliminate the possible adverse
effects of the Rule 14a-2(b)(9)(ii) conditions on the independence of
proxy voting advice.\288\ Proxy voting advice that is independent may
provide clients of PVABs and other investors, who become aware of such
recommendations, with information that would not otherwise have
appeared in the proxy or information statement. This could help clients
of PVABs and other investors make better voting and investment
decisions. One commenter expressed the view that the proposed
amendments would strengthen the independence of PVABs.\289\ Another
commenter, however, stated that the 2021 Proposing Release did not
provide evidence that the 2020 Final Rules negatively affected the
independence of proxy voting advice.\290\ While we are unable to
quantify such negative effects for the reasons discussed in more detail
above, we believe that the risks posed by the Rule 14a-2(b)(9)(ii)
conditions to the cost, timeliness, and independence of proxy voting
advice are sufficiently significant such that it is appropriate to
rescind the conditions now to limit any burdens that PVABs and their
clients may experience.\291\ In making this judgment, we have
considered that the vast majority of PVABs' clients and investors that
expressed views on the Rule 14a-2(b)(9)(ii) conditions continue to be
concerned about the risks those conditions pose.
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\288\ See supra note 118.
\289\ See letter from CII.
\290\ See letter from BIO.
\291\ See supra Section II.A.3.
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Finally, one commenter asserted that the Commission did not
articulate any real benefits of deleting Note (e).\292\ As stated in
the 2021 Proposing Release, we do not expect that the deletion of Note
(e) will generate any significant benefits other than avoiding any
misperception that its adoption purported to determine or alter the law
governing Rule 14a-9's application and scope, including its application
to statements of opinion. Deleting Note (e) may reduce any increased
litigation risk or costs to PVABs that such a misperception may have
caused. Notwithstanding this deletion, a PVAB may, depending on the
particular facts and circumstances, be subject to liability under Rule
14a-9 for a material misstatement in, or an omission of material fact
from, proxy voting advice covered by Rule 14a-1(l)(1)(iii)(A),
including with regard to its methodology, sources of information, or
conflicts of interest. \293\ Thus, we expect that this amendment will
not have any significant economic effect.
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\292\ See letter from BIO.
\293\ See supra Section II.B.3.
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2. Costs
The amendments may impose costs on the clients of PVABs--and,
thereby, ultimately the investors they serve--by potentially reducing
the overall mix of information available to those clients as they
assess proxy voting advice and make determinations about how to cast
their votes. Requiring PVABs to provide registrants with proxy voting
advice no later than the time that they disseminate such information to
their clients could allow registrants to more effectively determine
whether they wish to respond to a recommendation by publishing
additional soliciting materials and to do so in a timely manner before
shareholders cast their votes. Registrants may wish to do so for a
variety of reasons, including, for example, because they may identify
what they perceive to be factual errors or methodological weaknesses in
a PVAB's analysis or have a different or additional perspective with
respect to the advice. In either case, clients of PVABs, and
registrants' investors in general, might have benefited from the
availability of additional information on which to base their voting
decisions. Clients of PVABs often must make voting decisions in a
compressed time period. Timely access to registrant responses to proxy
voting advice could facilitate a client's evaluation of the advice by
highlighting disagreements regarding facts and data, differences of
opinion, or additional perspectives before the client casts its votes.
To the extent that the amendments reduce this type of information and
it is valuable to investors, the amendments may make it more costly for
investors to obtain such information and make timely voting decisions.
One commenter took the position that eliminating the Rule 14a-
2(b)(9)(ii) conditions would create a substantial risk to registrants
that they would be unable to timely correct errors and
mischaracterizations in PVABs' proxy voting advice before the annual
meeting.\294\ According to this commenter, companies must pay close
attention to proxy voting advice and address any errors before
investors have completed voting because, once investors have voted, it
is often too late to make changes. The longer the time period between
when a registrant identifies an error and responds to it, the commenter
maintained, the less likely the error is to receive the investor's full
attention. The same commenter also argued that the costs of correcting
errors creates disincentives for PVABs to acknowledge them. To the
extent that the rescission of the Rule 14a-2(b)(9)(ii) conditions limit
a registrant's ability to timely identify errors and
mischaracterizations in proxy voting advice, the rescission could
increase costs to investors and registrants. We note, however, that the
error rate in proxy voting advice appears to be low. For example, the
commenter cites the ACCF study that identified instances during 2021 in
which registrants filed supplemental proxy materials to dispute the
data or analysis in proxy voting advice that represented less than one
percent of the proxy materials filed by registrants that year.\295\
Additionally, as mentioned above, we believe that the perpetuation of
material errors in proxy voting advice would reduce the quality and
usefulness of such advice, which, in the long-term, would reduce a
PVAB's credibility in the market and its competitiveness. As such, we
believe that PVABs are financially motivated to address errors in their
advice.
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\294\ See letter from CEC.
\295\ As noted in Section IV.A.1.c, approximately 5,565
registrants filed proxy materials with the Commission during
calendar year 2021.
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Additionally, to the extent that a PVAB might have relied on the
safe harbor of Rule 14a-2(b)(9)(iii), which requires PVABs to provide
registrants with their proxy voting advice for no charge, the
amendments may cause some registrants to incur costs in the form of
fees or the purchase of additional PVAB services in order to obtain and
respond to proxy voting advice. Investors ultimately will bear any such
costs.
The potential cost associated with the amendments may be mitigated,
however, by the practices and standards that PVABs have voluntarily
adopted to help improve the basis of their proxy voting advice. For
example, some PVABs have voluntarily adopted practices aimed at
enabling feedback from certain registrants before and after they
disseminate proxy voting advice to their clients.\296\ Additionally,
the BPPG's principles and the Oversight Committee's role in assessing
compliance with those principles could address some of the concerns
underlying the Rule 14a-2(b)(9)(ii) conditions. Moreover, because PVABs
voluntarily adopted these practices, we believe that they are less
likely to adversely affect the independence, cost, and timeliness of
proxy voting advice than any additional measures that
[[Page 43188]]
PVABs may have needed to implement to satisfy the Rule 14a-2(b)(9)(ii)
conditions. One commenter noted that the Commission's analysis assumed
that such voluntary practices would remain in place even if the Rule
14a-2(b)(9)(ii) conditions are rescinded.\297\ While we cannot know for
sure whether these voluntary practices will continue, we agree with the
commenters that asserted that PVABs have market-based incentives to
maintain these practices, and we also believe the industry-wide
standards of BPPG's principles and the role of the Oversight Committee
provide further incentives for PVABs to do so. Moreover, as noted
above, we will continue to monitor the PVAB market to help ensure that
investors are adequately protected and have ready access to information
that allows them to make informed voting decisions.
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\296\ See 2021 Proposing Release at 67386-87.
\297\ See letter from Prof. Verret.
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One commenter asserted that registrants and clients of PVABs may
have incurred costs in preparing for the 2020 Final Rules, such as
amending proxy voting back-office functions for shareholder engagement,
designing new bylaws or charter provisions that govern relationships
with shareholders, or amending proxy voting policies.\298\ To the
extent that registrants and PVABs' clients have taken such steps,
rescinding the Rule 14a-2(b)(9)(ii) conditions would render them
unnecessary and may lead to their reversal, resulting in costs for both
registrants and PVABs' clients. But commenters have presented no
specific examples of entities that have actually taken action or
incurred costs in reliance on the Rule 14a-2(b)(9)(ii) conditions, nor
have commenters provided evidence that would allow us to quantify those
costs or that give reason to believe that they are significant. At the
same time, we expect that the amendments will result in costs savings
for PVABs in the form of some initial costs, ongoing direct costs, and
potential indirect costs they would have incurred to comply with the
Rule 14a-2(b)(9)(ii) conditions.\299\
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\298\ See id.
\299\ Similar to registrants and PVABs' clients, PVABs may have
incurred certain initial costs in preparing for compliance with the
Rule 14a-2(b)(9)(ii) conditions.
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One commenter asserted that the Commission's economic analysis
failed to appreciate the potential for conflicts of interest that exist
between PVABs and the institutional investors that use their services,
as well as between the managers of institutional investor funds and the
investors whose interests they represent.\300\ While we agree that
potential conflicts of interest may exist between PVABs and their
institutional clients, we do not believe that the Rule 14a-2(b)(9)(ii)
conditions are necessary to address that concern, or that rescinding
the Rule 14a-2(b)(9)(ii) conditions will exacerbate it. Rather, the
2020 Final Rules address such conflicts through Rule 14a-2(b)(9)(i),
which requires PVABs to provide their clients with certain conflicts of
interest disclosures in connection with their proxy voting advice. The
current rulemaking does not amend Rule 14a-2(b)(9)(i). Additionally,
PVABs may, depending on the particular facts and circumstances, be
subject to liability under Rule 14a-9 for a material misstatement in,
or omission of material fact from, proxy voting advice covered by Rule
14a-1(l)(1)(iii)(A), including with regard to their methodology,
sources of information, or conflicts of interest. As to potential
conflicts between managers of institutional investor funds and the
investors whose interests they represent, we believe that such
conflicts are directly addressed in other regulations.\301\
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\300\ See id.
\301\ See, e.g., Commission Interpretation Regarding Standard of
Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019)
[84 FR 33669, 33671 (July 12, 2019)] (discussing how an investment
adviser's duty of loyalty under its fiduciary duty requires, amongst
other things, that it must eliminate or make full and fair
disclosure of all conflicts of interest which might incline an
investment adviser--consciously or unconsciously--to render advice
which is not disinterested such that a client can provide informed
consent to the conflict); see also Rule 206(4)-6 under the
Investment Advisers Act of 1940, 17 CFR 275.206(4)-6 (prohibiting an
investment adviser to exercise voting authority with respect to
client securities, unless the adviser (i) has adopted and
implemented written policies and procedures that are reasonably
designed to ensure that the adviser votes proxies in the best
interest of its clients, which procedures must include how the
investment adviser addresses material conflicts that may arise
between the adviser's interests and interests of their clients; (ii)
discloses to clients how they may obtain information from the
investment adviser about how the adviser voted with respect to their
securities; and (iii) describes to clients the investment adviser's
proxy voting policies and procedures and, upon request, furnishes a
copy of the policies and procedures to the requesting client).
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Finally, just as we do not expect the deletion of Note (e) to
generate any significant benefits, we do not expect that its deletion
will create any significant costs for PVABs, investors, or registrants.
Given that this amendment will not alter a PVAB's potential liability
under Rule 14a-9, we expect that its economic impact will be minimal.
One commenter took the position that, in addition to deleting Note (e),
the Commission also should exempt certain portions of proxy voting
advice from Rule 14a-9 liability to provide investors with additional
comfort that they will not indirectly bear the costs of litigation on
the basis of mere disagreements regarding a PVAB's analysis,
methodology, or sources of information.\302\ We believe that this
approach is not appropriate for the reasons discussed in Section
IV.D.2.
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\302\ See letter from CII.
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C. Effects on Efficiency, Competition, and Capital Formation
As discussed in Section IV.A, PVABs perform a variety of functions
for their clients, including analyzing and making voting
recommendations on matters presented for shareholder votes in
registrants' proxy statements as an alternative or supplement to their
clients' own internal resources. Rather than using these services,
PVABs' clients could instead solely rely upon internal resources to
research, analyze, and execute proxies.\303\ Given the costs of
researching and voting proxies, the services offered by PVABs may offer
economies of scale relative to their clients performing these functions
themselves. For example, a GAO study found that among 31 institutions,
including mutual funds, pension funds and asset managers, large
institutions rely less than small institutions on the research and
recommendations offered by PVABs.\304\ Small institutional investors
surveyed in the study indicated they had limited resources to conduct
their own research.\305\
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\303\ PVABs' clients may also rely on some combination of
internal and external analysis.
\304\ See U.S. Gov't Accountability Office, GAO-07-765, Report
to Congressional Requesters, Corporate Shareholder Meetings: Issues
Relating to the Firms that Advise Institutional Investors on Proxy
Voting, 2 (2007), available at <a href="https://www.gao.gov/new.items/d07765.pdf">https://www.gao.gov/new.items/d07765.pdf</a> (``2007 GAO Report''). See generally letter in response
to the 2019 Proposing Release from Business Roundtable (Feb. 3,
2020) (stating that because many institutional investors face voting
on a large number of corporate matters every year but lack personnel
and resources for managing such activities, they outsource tasks to
proxy advisors); letters in response to the SEC Staff Roundtable on
the Proxy Process from BlackRock (Nov. 16, 2018) (stating that
``BlackRock's Investment Stewardship team has more than 40
professionals responsible for developing independent views on how we
should vote proxies on behalf of our clients''); NYC Comptroller
(Jan. 2, 2019) (stating that we ``have five full-time staff
dedicated to proxy voting during peak season, and our least-tenured
investment analyst has 12 years' experience applying the NYC Funds'
domestic proxy voting guidelines'').
\305\ See 2007 GAO Report, supra note 304, at 2; see also letter
in response to the SEC Staff Roundtable on the Proxy Process from
Ohio Public Retirement (Dec. 13, 2018) (``OPERS also depends heavily
on the research reports we receive from our proxy advisory firm.
These reports are critical to the internal analyses we perform
before any vote is submitted. Without access to the timely and
independent research provided by our proxy advisory firm, it would
be virtually impossible to meet our obligations to our members.'');
Transcript of SEC Roundtable on the Proxy Process at 194 (Nov. 15,
2018), available at <a href="https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf">https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf</a> (comments of Mr. Scot Draeger, stating that:
``If you've ever actually reviewed the benchmarks, whether it's ISS
or anybody else, they're very extensive and much more detailed than
small firm[s] like ours could ever develop with our own independent
research.'').
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[[Page 43189]]
To the extent that the 2020 Final Rules increase compliance costs
and costs related to litigation risk for PVABs that could be passed on
to clients, the amendments would reverse those increases along with any
related decrease in demand for PVABs' advice. If PVABs offer economies
of scale relative to their clients performing certain functions
themselves, increased demand for, and reliance on, PVABs' services
could lead to greater efficiencies in the proxy voting process.
To the extent that the Rule 14a-2(b)(9)(ii) conditions impair the
independence of proxy voting advice or reduce the diversity of thought
in the market for proxy voting advice (e.g., by PVABs erring on the
side of caution in complex or contentious matters), eliminating those
conditions could reverse those effects, resulting in advice from PVABs
that contributes to more informed proxy voting decisions by their
clients. If clients perceive the amendments as positively affecting
PVABs' objectivity and independence, demand for proxy voting advice
could increase, and the proxy voting process may become more
efficient.\306\
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\306\ As noted above, we do not have financial data about PVABs,
including financial data by services provided or by client type.
This makes assessments on a quantitative basis difficult.
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On the other hand, the amendments could make the proxy voting
process less efficient if they reduce the overall mix of information
available to PVABs' clients and investors in general and the
information lost is valuable to investors. For example, rescinding the
Rule 14a-2(b)(9)(ii) conditions, may limit prompt registrant responses
to proxy voting advice and investor access to such responses, which
could make it more costly for investors to obtain such information and
make timely voting decisions.
In addition, any reduction in costs for PVABs due to the rescission
of the Rule 14a-2(b)(9)(ii) conditions could increase competition for
proxy voting advice compared to the current baseline, which includes
the effect of the 2020 Final Rules. In particular, if PVABs pass costs
incurred to comply with the conditions on to their clients, the
reduction of these costs due to the amendments could encourage some
investors to retain the services of PVABs, which could reduce the use
of internal resources for voting. Also, any improvement in the
independence of proxy voting advice that preserves investors'
confidence in the integrity of such advice could cause PVABs to compete
more on this dimension. Finally, any reduction in compliance costs and
costs related to litigation risk, if large enough, may increase
competition among PVABs by encouraging entry into the market for proxy
voting advice.\307\ However, given the fact that there are only three
major PVABs in the United States, we do not expect that the amendments
would significantly increase the likelihood of new entry into this
market.
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\307\ See letter in response to the 2019 Proposing Release from
Minerva Analytics (Feb. 22, 2020), available at <a href="https://www.sec.gov/comments/s7-22-19/s72219-6615792-202950.pdf">https://www.sec.gov/comments/s7-22-19/s72219-6615792-202950.pdf</a>. In its comment letter,
Minerva, a PVAB in the U.S. market prior to 2010, stated that the
threat of litigation for ``errors'' is a factor influencing its
views on whether to reenter the U.S. market. Id.
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If the amendments facilitate the ability of PVABs' clients to make
informed voting determinations, investment outcomes could improve for
investors, which could lead to a greater allocation of resources to
investment. To the extent that the amendments lead to more investment,
we could expect greater demand for securities, which could, in turn,
promote capital formation. Overall, given the many factors that can
influence the rate of capital formation, we expect any effect of the
amendments on capital formation to be small.
In addition, we do not expect the deletion of Note (e) to have any
significant ec
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