SEC proxy roll-back - researchers and clients still vulnerable

July 15, 2022

The SEC’s amendments to the Trump administration's 2020 rules only partially address investor concerns over attacks on independence of proxy voting advice 

The US Securities and Exchange Commission (SEC) has narrowly voted to adopt amendments to its rules to increase proxy voting regulation, as proposed in November 2021. 

Its new amendments will rescind key clauses of the rules applicable to proxy voting advice businesses that the Commission adopted in 2020 under Trump.

Under the 2020 rules, proxy research and agency services were classified as a 'proxy solicitation' subject to information and filing requirements unless an exemption applies. To qualify for such an exemption, proxy voting services were required to, among other things, adopt and disclose written policies and procedures that obliged proxy services to:

• provide free copies of research to companies before it was distributed to clients; and
• distribute companies' written responses to the research to clients

Institutional investors highlighted that these conditions increased compliance costs, and also impaired the independence and timeliness of their voting advice. 

At the time the rules were proposed, Minerva CEO, Sarah Wilson wrote a comprehensive response to the SEC Consultation citing “significant, far-reaching and harmful impacts” on the US proxy landscape.

“We believe that the highly-charged and well-funded political campaign that has been waged against proxy advisors (and by extension, their clients) is based not just on low-quality ‘academic research’ but on a deliberately ill-conceived understanding of the role of service providers in the stewardship process,” Wilson said.

In a partial win for proxy advisers, this week's amendment eliminates the restrictive exemption rules. SEC Chair Gary Gensler, said: “I am pleased to support these amendments because they address issues concerning the timeliness and independence of proxy voting advice, which would help to protect investors and facilitate shareholder democracy.” 

Although these changes indicate a shift in the right direction for independent proxy advice, one harmful aspect of the draconian Trump-era rules remains. Proxy research services will still be classified as a 'proxy solicitation', meaning they are subject to anti-fraud provisions prohibiting false or misleading information.

In practice, proxy services will remain subject to liability for material misstatements and omissions of fact, excluding differences of opinion in voting research, including a proxy advisor exercising its discretion to rely on a particular analysis, methodology or data set rather than alternatives advanced by companies or other parties.

"Minerva remains greatly concerned over the potential misuse of the SEC proxy rules. Classifying proxy advice services, which should more clearly be named 'proxy research services,' as a solicitation fundamentally misunderstands the relationship between such service providers and their clients. Minerva is neutral about its clients' voting intentions; Minerva's aim is to ensure that votes are cast with the best possible information available. To classify research and data as a "solicitation" just doesn't make sense."

Sarah Wilson, CEO, Minerva Analytics

Inevitably, the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC) has responded forcefully to the SEC's proposals. While investors have made it clear that the rules were harming their ability to make informed voting decisions, the Chamber of Commerce holds fast to its position that the rules were designed to "root out and eliminate misinformation and conflicts of interest in the proxy process so that investors would have access to high quality information free of bias". Speaking on behalf of the Chamber of Commerce, Tom Quaadman, said that the Chamber was considering its position on the changes, noting that it will "consider all available options including the courts to stop these unwarranted and clearly political steps backward".

However, speaking in support of the amendments, outgoing Commissioner Allison Herren Lee noted the "absence of any credible evidence suggesting pervasive, or even moderate, errors in proxy voting advice. In fact, the Commission’s analysis has shown that the supposed error rate for proxy voting advice is vanishing to none. Not only was there no clear basis for a rule that increased the involvement of conflicted parties in proxy voting advice, but investors (the supposed beneficiaries of the new rules) stated emphatically that this aspect of the new rules would interfere with, rather than promote, efficient proxy voting by introducing unnecessary cost and delay and increasing the risk of impaired independence".