Exemptions from the Proxy Rules for Proxy Advice: A Small Entity Compliance Guide [*]

Introduction

On July 22, 2020, the Securities and Exchange Commission (the “Commission”) voted to adopt amendments to its rules governing proxy solicitations. The amendments aim to facilitate the ability of those who use proxy voting advice—investors and others who vote on investors’ behalf—to make informed voting decisions without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.

Who is affected by the amendments?

The amendments affect a variety of parties, including (i) proxy voting advice businesses (i.e., persons who provide proxy voting advice that falls within the definition of a “solicitation” under Rule 14a-1(l)(1)(iii), as amended) [1] and (ii) registrants who are conducting solicitations and are the subject of proxy voting advice. Although not directly subject to the amendments, clients of proxy voting advice businesses and the investors on whose behalf such clients vote proxies may be indirectly affected by the amendments to the extent that the costs borne by the proxy voting advice businesses result in increased fees for such services.

What do the amendments do?

The federal proxy rules contain exemptions from certain requirements, including the requirements to file a proxy statement. The amendments to these rules include conditions that proxy voting advice businesses must meet in order to utilize two of these exemptions. Specifically, proxy voting advice businesses must:

1. provide their clients with tailored and comprehensive conflicts of interest disclosure;
2. have policies and procedures designed to ensure that registrants that are the subject of proxy voting advice have such advice made available to them in a timely manner; and
3. have policies and procedures designed to ensure that their clients are provided with an efficient and timely means of becoming aware of any written responses by registrants to proxy voting advice.

In addition, consistent with its longstanding view, the Commission amended the definition of “solicitation” as used in the Exchange Act to specify that the definition includes proxy voting advice, with certain exceptions. The amendments also provide additional illustrative examples related to proxy voting advice in the proxy rules’ antifraud provision in Exchange Act Rule 14a-9, which are designed to help ensure that proxy voting advice businesses provide clients with the material information they need to make fully informed decisions.

What specific changes were made to the rules?

• Rule 14a-1(l). New paragraph (A) to Rule 14a-1(l)(1)(iii) specifies the circumstances in which a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules.[2] In addition, new paragraph (v) to Rule 14a-1(l)(2) codifies the Commission’s view that proxy voting advice provided by a person who furnishes such advice only in response to an unprompted request shall not be deemed to be a solicitation.
• Rules 14a-2(b)(1) and 14a-2(b)(3). Rules 14a-2(b)(1) and (b)(3) provide exemptions from the information and filing requirements of the proxy rules. Under the amendments, in order for proxy voting advice businesses to rely on these exemptions, they must satisfy the following conditions of new Rule 14a-2(b)(9):
  • They must provide specified conflicts of interest disclosure in their proxy voting advice or in an electronic medium used to deliver the proxy voting advice [Rule 14a-2(b)(9)(i)]; and
  • They must have adopted and publicly disclosed 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 the proxy voting advice business’s clients [Rule 14a-2(b)(9)(ii)(A)]; and
    • The proxy voting advice business 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 who are the subject of such advice, in a timely manner before the security holder meeting [Rule 14a-2(b)(9)(ii)(B)].

    To give assurance to a proxy voting advice business regarding ways that it can satisfy these two principles-based requirements, the new rules include the following non-exclusive safe harbors:

    • A proxy voting advice business will be deemed to satisfy the requirements of Rule 14a-2(b)(9)(ii)(A) if its written policies and procedures are reasonably designed to provide registrants with a copy of its proxy voting advice, at no charge, no later than the time it is disseminated to the business’s clients. The safe harbor also specifies that such policies and procedures may condition dissemination of proxy voting advice to a registrant on the registrant having (i) filed its definitive proxy statement at least 40 calendar days before the security holder meeting and (ii) expressly acknowledged that it will only use the proxy voting advice for its internal purposes and/or in connection with the solicitation and will not publish or otherwise share the proxy voting advice except with the registrant’s employees or advisers.
    • A proxy voting advice business will be deemed to satisfy the requirements of Rule 14a-2(b)(9)(ii)(B) if its written policies and procedures are reasonably designed to provide notice on its electronic client platform or through email or other electronic means that the registrant has filed, or has informed the proxy voting advice business that it intends to file, additional soliciting materials setting forth the registrant’s statement regarding the advice (and include an active hyperlink to those materials on EDGAR when available).
• Rule 14a-9. The amendments modify Rule 14a-9 to include examples of when the failure to disclose certain material information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. These examples include material information about the proxy voting advice business’s methodology, sources of information, or conflicts of interest.

Refer to the adopting release for a complete description of all amendments.

What are the compliance dates of the amendments?

The amendments are effective on November 2, 2020, but proxy voting advice businesses subject to the final rules will not be required to comply with the amendments to Rule 14a-2(b)(9) until December 1, 2021.

Other Resources

The adopting release for the new rules can be found on the SEC’s website at https://www.sec.gov/rules/final/2020/34-89372.pdf.

Contacting the SEC Staff

The SEC’s Division of Corporation Finance is happy to assist small companies and others with questions regarding the amendments. You may contact the Division for this purpose at (202) 551-3440 or at https://www.sec.gov/forms/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning smaller reporting companies may be directed to the Division’s Office of Small Business Policy at (202) 551-3460.

The SEC’s Division of Investment Management’s Chief Counsel’s Office is also available to assist small entities and others with questions regarding the new rules and rule amendments applicable to investment companies. You can contact the Office for this purpose at: 202-551-6825 or IMOCC@sec.gov.

[*] This guide, dated as of November 2, 2020, was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for the rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.