How is the SEC proposing to regulate proxy advisers?
Proxy advisers, such as Institutional Shareholder Services (ISS) or Glass Lewis, provide services to shareholders to help them vote their shares at company shareholder meetings. As well as assisting with the execution of their client’s vote instructions, they also provide proxy research that gives recommendations on how to vote on different agenda items, based on either their own voting guidelines or on the specific policies of their clients.
In August 20191, the SEC reversed a long-held position, and declared that those who publish proxy voting research and/or issue recommendations would now be considered to be partaking in “proxy solicitation”. SEC rules define a ‘solicitation’ as a communication sent to other investors to get them to vote in a certain way. Previously a narrower definition had been applied, whereby only those who sent communications to all shareholders publicly to persuade them to vote in a certain direction were soliciting. By contrast, they will now
apply a much broader definition of proxy solicitation, whereby anyone issuing advice on how to vote, including those only advising specific clients, is soliciting.
The consequence of this is that, under existing securities laws, those who conduct proxy solicitation are required to, amongst other things, publicly file all communications with the SEC. This would be inconceivable for a proxy adviser to do, as it would undermine their business model by requiring them to publicly disclose their proprietary research. In addition, they would face liability for publishing anything that could be interpreted as either materially misleading or a misstatement from omission.
In order to be exempt from these requirements, there are a new set of requirements that proxy advisers must meet, including providing an opportunity for companies to review and give feedback on draft reports for a period of up to 13 days before sending it to clients, and allowing companies to provide a written response that would be linked to within the final published report.