June 04, 2021
SEC Chairman Gensler this week initiated an examination of the proxy advisory rules finalized in 2020, with the likely goal of revisiting them. The same day, Commissioners Peirce and Roisman released a joint statement highlighting the need for proxy advisory reform while defending the SEC’s process for finalizing the rules in 2020.
A bit of background: Proxy advisory firms have avoided meaningful accountability while concerns about their influence, opacity, and error rate have grown. HR Policy Association’s Center On Executive Compensation has advocated for greater accountability since 2008. The proxy advisory rules finalized in 2020 affirmed the SEC’s view that a proxy advisor’s report qualifies as a proxy solicitation. To remain exempt from onerous filing and disclosure rules, proxy advisors would have to provide companies with a copy of their report, the opportunity to respond to errors, and disclose conflicts of interest. ISS, the largest proxy advisory firm, filed a lawsuit challenging the new rules. In addition to filing comprehensive comments on the proposed rule, the Center joined with the U.S. Chamber of Commerce in filing an amicus brief in support of the SEC’s position.
However, the SEC is now pausing any enforcement of the rules and is asking, along with ISS, that the court suspend the ISS litigation during its review. Further, if the exemption requirements currently included in the rules are left in place after its review, the SEC committed to not enforcing them until after ISS resumes its litigation challenging the guidance and rules.
Commissioners Peirce and Roisman questioned why this review is necessary given that compliance with the rules is not effective until December 2021. “[T]he compliance date for the exemption conditions is still months away, which makes it challenging, if not impossible, for us to know how these requirements will work in practice… We find it even harder to understand how the Commission would justify a departure from its longstanding legal interpretation about proxy solicitation.” The commissioners highlighted the extensive rulemaking process as well as the consideration and incorporation of multiple viewpoints (including those in opposition to the rule).
Outlook: There has been no congressional effort to overturn the proxy advisory rule with the Congressional Review Act (as there was with adjustments to shareholder proposal eligibility requirements), so it’s puzzling why the SEC would choose to revisit these rules now. Though the Center advocated for stronger accountability requirements in the rules, especially the need for review prior to publication and the start of proxy voting, we offered broad support for the final rule and the market viewed the rules as a fair effort to achieve a reasonable middle ground.