“Regulatory Seesaw”: SEC Rescinds Key Provisions of Proxy Advisory Rules

The SEC voted this week by 3-2 to adopt amendments to its existing, not yet effective rules governing proxy voting advice by rescinding key provisions that would have helped curb proxy advisors. Dissenting Commissioner Hester Peirce cited the Center several times in her opinion.

• Bowing to significant pressure from ISS and others, the amendments rescind two important rules applicable to proxy advisors adopted in 2020: that companies should get proxy reports in a timely manner and that they should be able to include written responses to their reports in the final report received by investors.
  
  
• The final amendments also delete the 2020 changes made to the proxy rules’ liability provision – specifically the part where the SEC discussed how it could be misleading for proxy advisors to omit their methodology or conflicts of interest. Essentially, the rule now affirms that “differences of opinion” are not enough to trigger liability – rather, “misstatements or omissions of material fact” are required.
  
  
• Finally, the adopting release rescinds guidance that the Commission issued in 2020 to investment advisers regarding their proxy voting obligations including how they consider company responses to proxy advisor recommendations. 

Commissioner Peirce cited the Center in her dissent statement: “When the Commission proposed these latest amendments nine months ago, nothing had changed since we adopted our 2020 Rules to justify repeal, so I voted no…the feedback we received during this proposal’s brief comment period confirmed my initial view.” Peirce then quoted the Center directly:   

We find it difficult to understand the Commission’s decision to propose amending the proxy solicitation exemption qualification requirements prior to having any data on their actual impact or cost…It is not possible to conduct an economic or cost benefit analysis for a rule that has not gone into effect, and the decision to amend a finalized rule without such data may have the unintended consequence of establishing an undesirable precedent impacting regulatory stability going forward. [Center On Executive Compensation]

Ironically, ISS was also upset by the ruling, since they believed the rule should have been “rescinded in its entirety” as it was a “solution in search of a problem.” Recently confirmed Commissioner Uyeda was perplexed about the reasons for the amendments in the absence of changes in the facts. He expressed concern that “this regulatory seesaw does not reflect administrative ‘best practices’ that promote long term reliance and confidence by market participants in the stability of important areas of securities regulation.” 

The vote on the rule amendments comes more than a year after Chair Gensler signaled that the SEC would revisit the proxy voting framework established by the SEC during 2019 and 2020 under the leadership of the Trump administration. The Center submitted comments to the SEC in December 2021 advising against this, since the original 2020 Final Rule represented a set of sensible updates which would have facilitated needed changes to the proxy process. In our comments we urged the Commission to allow the 2020 changes to take effect before considering further updates.

The SEC’s final amendments and rescission of the guidance will become effective 60 days after publication in the Federal Register. In the meantime, read the fact sheet and final rule.

Meanwhile, the SEC also proposed new rules that would make it easier for activists to submit shareholder proposals and much more difficult for companies to exclude them. We will report on this in more detail next week.