SEC Proposes Rules to Give Companies Mandatory Proxy Advisory Firm Report Review Periods

November 15, 2019

In a move strongly supported by our Center On Executive Compensation, the Securities and Exchange Commission approved proposed rules that would require proxy advisory firms to take additional steps in order to qualify for the exemption to the federal proxy solicitation rules.

Background:  The federal proxy solicitation rules are the same rules companies must follow when filing a proxy statement—and are very onerous and expensive to comply with.  Under current rules, however, proxy advisory firms are provided with an exemption that allows them to issue proxy voting advice without enduring the same compliance burdens and expenses.  The Center has been a strong advocate of imposing requirements for proxy advisory firms to obtain this exemption.

The proposed rules add requirements proxy advisory firms must meet in order to take advantage of that exemption and avoid significant compliance costs and burdens.  These additional requirements include:

  • Adoption of the “5-Day Review Rule”: Proxy advisory firms will be required to give all U.S.-listed issuers up to five days to review draft proxy reports.  The earlier a company’s proxy statement is filed in relation to the date of the annual meeting, the more days they will have for review.  Based on typical company filing timelines, most companies will receive three days to review the draft reports.  This idea was championed by the Center in comments to last fall’s SEC Proxy Process Roundtable.
Proxy Filing Compared to Annual MeetingMandated Days of Review 
More than 45 days prior to the Annual MeetingAt least 5 business days 
Between 25 and 45 days, but more than 25 days prior to the Annual MeetingAt least 3 business days 
Fewer than 25 days prior to the Annual MeetingNo mandated review 
  • Review of final proxy report prior to publication:  Proxy advisory firms will be required to provide “a final notice of voting advice” to companies.  According to the proposal, the “final notice” must:

    • Timeline:  Be provided at least two business days prior to dissemination to clients whether or not the company provided comments during the draft report review;

    • Content:  Include a copy of the final proxy report that will be sent to clients/investors and includes any revisions to the report made as a result of the review and feedback period; and

    • Link to company feedback:  Provide companies with the ability to include a hyperlink to a company statement in the final proxy report that will be sent out to clients/investors.
  • Mandatory conflict of interest disclosures:  Proxy advisory firms will be required to provide “standardized conflict of interest” disclosures within each proxy report.

The SEC also included a rulemaking proposal that would update the federal securities laws to explicitly include proxy voting advice from proxy advisory firms as a proxy solicitation.  The inclusion of this component is aimed at a lawsuit recently filed by ISS.

Center to weigh in:  The Center is generally supportive of the proposed rules and will provide comments while encouraging the SEC to finalize the rules within the next few months.