SEC Finalizes HR Policy-Supported Reforms to the Proxy Advisory Firm Industry

July 24, 2020

The Securities and Exchange Commission finalized rules, called for by our Center On Executive Compensation, requiring proxy advisory firms to provide all companies with access to final proxy reports and to distribute to investor clients company responses to voting recommendations.

The SEC’s actions capped a nearly two-year long rulemaking effort focusing on the proxy process in which the Center played a major role in ensuring regulators understood company concerns.  The Commission cited the Center’s comments numerous times in the final rule.

Starting with the 2022 proxy season, the final rules require proxy advisory firms to implement several changes, including:

  • All companies must have the ability to obtain a final proxy report prior to or in conjunction with general distribution to a proxy advisor’s clients.

  • Proxy advisors must notify investor clients of, and provide a hyperlink to a company response to, the proxy advisory firm report in "a timely manner before the shareholder meeting (or, if no meeting, before the votes, consents, or authorizations may be used to effect the proposed action)."  On the timing, in his remarks, Commissioner Elad Roisman explained that the notification of a company response must be issued "in a timely manner before those clients vote." 

  • Proxy advisors must provide specific conflict of interest disclosures in the proxy report or within the medium delivering the proxy report to investors.  

Proxy reports constitute a federal proxy solicitation subject to anti-fraud rules, which means that an advisory firm could be subject to lawsuits for materially false or misleading statements made in a proxy report.  The SEC also officially codified its view that proxy voting recommendations provided by proxy advisory firms constitute a federal proxy solicitation subject to federal rules.  Unless proxy advisory firms comply with the new rules, they would be subject to the same expansive and costly rules companies must follow in filing their annual proxy statements. 

New investor guidance Q&As address robo-voting concerns.  The Commission also updated guidance addressing the use of proxy advisory firms by investment advisors and specifically addressed the practice of “automatic voting”—also known as robo-voting.

A summary of the final rule can be found on HR Policy Online.