Protecting the Independence of the Proxy Voting Process: Statement on Amendments Governing Proxy Voting Advice
July 13, 2022
The free and fair exercise of shareholder voting rights is essential to a well-functioning system of corporate democracy, one that helps ensure that shareholders can exercise appropriate oversight of the companies they own. As shareholders increasingly vote through institutional asset managers, proxy advisors play a unique and important role in informing that process and enabling shareholders to protect their interests and their capital.
Individual shareholders and individual asset managers generally cannot afford to conduct, on their own, the kind of research proxy advisors provide. It is therefore critically important that the Commission’s regulation of proxy advisors does not impede the provision of timely and independent proxy voting advice or otherwise create unnecessary burdens on the exercise of shareholder voting. For that reason, I’m pleased to support today’s amendments reconsidering certain aspects of our rules and guidance regarding proxy voting advice.
Specifically, the Commission is rescinding two elements of its 2020 proxy advisor rules that generated significant concerns among investors and other commenters. The first involves mechanisms to enhance management’s influence over proxy voting advice by effectively requiring that issuers be given advance access and an opportunity to respond to such advice, and that proxy advisors separately notify their clients of those responses despite the fact that they are publicly filed.[1] The second change rescinds a note to the proxy-related anti-fraud provisions which added examples of misstatements related to proxy voting advice that created uncertainty regarding the scope of liability for such advice.
In addition to eliminating these provisions, the Commission is rescinding certain supplemental guidance for investment advisers that was issued in connection with the 2020 amendments in response to comments that such guidance was unnecessary in light of existing previous guidance, risked increasing uncertainty regarding adviser obligations, and no longer made sense in light of the rescission of related provisions of the 2020 rules.[2] At the same time, the Commission is retaining other elements of its recent regulation of proxy advisors including the guidance issued in 2019 and the provisions of the 2020 rulemaking designed to enhance disclosure regarding conflicts of interest.
The result of the amendments we adopt today will be better tailored and supported rules governing proxy voting advice that better balance the needs of investors and other market participants and better reflect the data we have available to us. On that last point, over the years, the Commission has gathered information regarding the proxy voting system through, for example, the issuance of a 2010 concept release[3] and the convening of a 2018 roundtable,[4] among other mechanisms.[5] This extensive gathering of data and views has identified evidence of a number of areas of concern related to proxy voting and potential reforms in that space. We know, for example, that many shareholders are unable to confirm their shares are voted in accordance with their instructions, a concern that could be addressed through required end-to-end vote confirmations.[6] There are likewise concerns about disclosure of voting information by funds that could be addressed by enhancements to Form N-PX.[7]
There was, however, throughout the information gathering process engaged in by the Commission, an absence of any credible evidence suggesting pervasive, or even moderate, errors in proxy voting advice.[8] In fact, the Commission’s analysis has shown that the supposed error rate for proxy voting advice is vanishing to none.[9] Not only was there no clear basis for a rule that increased the involvement of conflicted parties in proxy voting advice, but investors (the supposed beneficiaries of the new rules) stated emphatically that this aspect of the new rules would interfere with, rather than promote, efficient proxy voting by introducing unnecessary cost and delay and increasing the risk of impaired independence.[10]
Today’s rulemaking is responsive to those concerns. It is also responsive to the consistent feedback and data the Commission has received regarding proxy voting advice, both historically and in response to the proposal we finalize today.
It is appropriate for the Commission from time to time to evaluate its rules and, where appropriate, make adjustments that reflect our best knowledge and judgment. Sometimes re-evaluations occur after many years, and sometimes after only a short time. In fact, the Commission changed course with respect to rules that had been on the books a very short time in 2018, 2019, and 2020.[11] This is not a new phenomenon. I hope the Commission will continue to re-evaluate rules when it has well-substantiated reason to do so. In addition, I hope the Commission also continues to evaluate the proxy voting system and consider ways to improve its transparency, accuracy, and efficiency, including through consideration of end-to-end vote confirmation and adoption of enhancements to Form N-PX.
Let me conclude by thanking the staff in the Divisions of Corporation Finance, Investment Management, and Economic and Risk Analysis, as well as the Office of the General Counsel for the diligent, thoughtful, and careful work on this release. I’m pleased to support today’s amendments. Thank you.
[1] The 2020 amendments added a new condition to the availability of an exemption from the information and filing requirements of the proxy rules for proxy voting advice. Specifically, the new condition required that proxy advisors adopt and publicly disclose policies and procedures reasonably designed to ensure that (1) 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 the proxy advisor’s clients; and (2) proxy advisors provide their 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 addition, the amendments set forth safe harbors for satisfying this new condition, including requirements that the proxy advisor make its advice available to registrants at no charge and that the proxy advisor provide a hyperlink to any registrant response. Moreover, the 2020 adopting release expressly encouraged proxy advisors to provide registrants with advance review of proxy voting advice. See Exemption from Proxy Rules for Proxy Voting Advice, Final Rule, Release No. 34-89372 (July 22, 2020).
[2] See Proxy Voting Advice, Final Rule, Release No. 34-[x], 41, n.161 (July 13, 2022) [Adopting Release].
[3] See Concept Release on the US Proxy System, Release No. 34-62495 (July 14, 2010) [Proxy Concept Release].
[4] See Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 2018).
[5] See, e.g., Universal Proxy, Proposed Rule, Release No. 34-79164 (Oct 26, 2016); Reporting of Proxy Votes on Executive Compensation and Other Matters, Proposed Rule (Oct. 8, 2010). Release Nos. 34-63123; see also Recommendation of the SEC Investor Advisory Committee (IAC) Proxy Plumbing (Sept. 5, 2019).
[6] See Proxy Concept Release at 40 (“In the Commission’s view, both record owners and beneficial owners should be able to confirm that the votes they cast have been timely received and accurately recorded and included in the tabulation of votes, and issuers should be able to confirm that the votes that they receive from securities intermediaries/proxy advisory firms/proxy service providers on behalf of beneficial owners properly reflect the votes of those beneficial owners. . . . One possible solution may be for all participants in the voting chain to grant to issuers, or their transfer agents or vote tabulators, access to certain information relating to voting records, for the limited purpose of enabling a shareholder or securities intermediary to confirm how a particular shareholder’s shares were voted.”).
[7] Id. at 49 (“We seek to examine whether Form N-PX should be amended to require disclosure of the actual number of votes cast by funds.”); see also Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Proposed Rule, Release No. 34-93169 (Sept. 29, 2021) (“To improve the utility of Form N-PX information for investors, we are proposing amendments to enhance the information funds currently report about their proxy votes on Form N-PX and to make that information easier to analyze.”).
[8] See Allison Herren Lee, Paying More For Less: Higher Costs for Shareholders, Less Accountability for Management (July 22, 2020) (“The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.”).
[9] See Adopting Release at 32, n.127 (“[T]he 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 . . . 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”); see also Recommendation of the SEC Investor Advisory Committee (IAC) Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020) (“From over 17,000 shareholder votes over three years, the number of possible factual errors identified by companies themselves in their proxy supplements amounts to 0.3% of proxy statements – and none of those is shown to be material or to have affected the outcome of the related vote.”).
[10] See, e.g., Council of Institutional Investors, Leading Investor Group Dismayed by SEC Proxy Advice Rules (Jul. 22,
2020) (“[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 (Jul. 22, 2020) (“Today's vote is a blow to the independence of research provided by proxy advisors to investors. The proxy advisor rule shifts power to corporate management and away from investors by allowing corporations to inappropriately influence proxy voting advice and intimidate proxy advisors with the threat of litigation.”).
[11] See, e.g., Proposed Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements, Proposed Rule, Release No. 34-85823 (May 10, 2019) (proposing to amend recently adopted provisions relating to the cross border application of certain security based swap requirements prior to their compliance date in response to “market participants and other commenters [who] have raised concerns regarding possible disruptive effects of the above requirements, suggesting that the requirements would create significant operational burdens and impose unwarranted costs”); Investment Company Liquidity Disclosure, Proposed Rule, Release No. IC-33046 (Mar. 14, 2018) (proposing to amend recently adopted provisions governing fund liquidity disclosure prior to their compliance date, noting that “we have received letters raising concerns that the public disclosure of a fund’s aggregate liquidity classification information on Form N-PORT may not achieve our intended purpose and may confuse and mislead investors” and that “these letters have caused us to question whether the current approach of disclosing aggregate liquidity fund profiles through Form N-PORT is the most accessible or useful way to facilitate public understanding of fund liquidity”). See also Disclosure of Payments by Resource Extraction Issuers, Final Rule, Release No. 34--90679 (Dec. 16, 2020) (reversing course on a host of provisions recently adopted by the Commission, when, by the Commission’s own reasoning in the adopting release, such reversals were not necessary under the Congressional Review Act disapproval of the recently adopted rule); Allison Herren Lee, Statement on Rules Governing the Disclosure of Payments by Resource Extraction Issuers (Dec. 16, 2020) (“The adopting release contends that the change in project definition alone would satisfy the CRA. Nevertheless the final rule reverses course on a host of other significant features of the 2016 rule, all of which will reduce transparency. These changes will reduce the number of companies required to disclose, reduce the amount of disclosure, reduce the liability that attaches to the disclosure, and reduce the promptness of the disclosure. At proposal, these changes were premised on Congressional concerns about compliance costs and anti-competitive effects. But since we have abandoned that rationale – and the release reasons these changes are not required to satisfy the CRA – it is not clear that we have any reasonable basis for these additional reversals from the Commission’s well-reasoned 2016 position.”).