Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, 47416-47420 [2019-18355]
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effective September 15, 2018, is
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[FR Doc. 2019–19542 Filed 9–9–19; 8:45 am]
BILLING CODE 4910–13–P
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 241
[Release No. 34–86721]
Commission Interpretation and
Guidance Regarding the Applicability
of the Proxy Rules to Proxy Voting
Advice
Securities and Exchange
Commission.
ACTION: Guidance and interpretation.
AGENCY:
The Securities and Exchange
Commission (the ‘‘SEC’’ or the
‘‘Commission’’) is providing an
interpretation and related guidance
regarding the applicability of certain
rules, which the Commission has
promulgated under Section 14 of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’ and such rules the
‘‘federal proxy rules’’), to proxy voting
advice.
DATES: Effective: September 10, 2019.
FOR FURTHER INFORMATION CONTACT:
Adam F. Turk, Special Counsel, at (202)
khammond on DSKBBV9HB2PROD with RULES
SUMMARY:
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551–3500, Office of Chief Counsel,
Division of Corporation Finance,
Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The
Commission is providing an
interpretation and related guidance
regarding the applicability of 17 CFR
240.14–1 and 240.14a–9 [Rules 14a–1
and 14a–9] under the Exchange Act [15
U.S.C. 78a et seq.] to proxy voting
advice.1
I. Introduction
II. Interpretation and Guidance Regarding
Applicability of Certain Federal Proxy
Rules to Proxy Voting Advice
III. Other Matters
I. Introduction
As the use of proxy advisory firms by
investment advisers and other
institutional investors has become more
widespread and the services offered by
proxy advisory firms have broadened,
we and our staff have examined how
proxy voting advice provided by proxy
advisory firms may be solicitations
under the federal proxy rules.2 In
addition, we and our staff have engaged
with the public through various forums
and statements on a variety of issues
related to the proxy voting process,
including those discussed below. For
example, in 2010, the Commission
issued a concept release that sought
public comment about, among other
things, the role and legal status of proxy
advisory firms within the U.S. proxy
system.3 In 2013, the staff held a
roundtable on the use of proxy advisory
firm services by institutional investors
and investment advisers.4 In 2014, the
1 Unless otherwise noted, when we refer to the
Exchange Act, or any paragraph of the Exchange
Act, we are referring to 15 U.S.C. 78a, at which the
Exchange Act is codified, and when we refer to
rules under the Exchange Act, or any paragraph of
these rules, we are referring to Title 17, part 240 of
the Code of Federal Regulations [17 CFR part 240],
in which these rules are published.
2 The Commission today is also publishing
guidance regarding the proxy voting responsibilities
of investment advisers under Rule 206(4)-6 under
the Investment Advisers Act of 1940, Form N–1A,
Form N–2, Form N–3, and Form N–CSR under the
Investment Company Act of 1940. See Commission
Guidance Regarding Proxy Voting Responsibilities
of Investment Advisers, Release No. IA–5325
(August 21, 2019) [ FR ] (‘‘Investment Adviser Proxy
Voting Guidance’’).
3 Concept Release on the U.S. Proxy System,
Release No. 34–62495 (July 14, 2010) [75 FR 42982
(July 22, 2010)] (‘‘Concept Release’’). The comment
letters received in response to the Concept Release
are available at https://www.sec.gov/comments/s714-10/s71410.shtml.
4 See SEC Announces Agenda, Panelists for
Roundtable on Proxy Advisory Services, available
at https://www.sec.gov/news/press-release/2013253. The letters received in response to the
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staff of the Divisions of Investment
Management and Corporation Finance
issued a Staff Legal Bulletin (‘‘SLB 20’’)
to provide guidance about the
availability and requirements of two
exemptions to the federal proxy rules
that are often relied upon by proxy
advisory firms.5 Most recently, the staff
hosted a roundtable on the proxy
process in November 2018 (the ‘‘2018
Roundtable’’) that included a panel on
the role of proxy advisory firms and
their use by investment advisers.6 In
connection with the 2018 Roundtable,
the public was invited to provide input
on questions that arise regarding the use
of proxy advisory firms and their
activities.7 We have carefully
considered the feedback received on
these topics, and with the benefit of this
extensive body of information, historical
experience, and engagement, the
Commission is today providing an
interpretation and related guidance
regarding the applicability of the federal
proxy rules to proxy voting advice
provided by proxy advisory firms.
Specifically, in Section II below, we
provide an interpretation and related
guidance on whether proxy voting
advice constitutes a ‘‘solicitation’’ under
the federal proxy rules, and the
application of Rule 14a–9 under the
Exchange Act to proxy voting advice.
The interpretation and related guidance
discussed below are part of the
Commission’s review of the overall
proxy process. As part of this effort, the
staff is also considering recommending
that the Commission propose rule
amendments to address proxy advisory
firms’ reliance on the proxy solicitation
exemptions in Exchange Act Rule 14a–
2(b).8
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announcement are available at https://
www.sec.gov/comments/4-670/4-670.shtml.
5 SEC Staff Legal Bulletin No. 20, Proxy Voting:
Proxy Voting Responsibilities of Investment
Advisers and Availability of Exemptions from the
Proxy Rules for Proxy Advisory Firms (June 30,
2014). SLB 20 represents the views of the staff of
the Divisions of Investment Management and
Corporation Finance. It is not a rule, regulation, or
statement of the Commission. Furthermore, the
Commission has neither approved nor disapproved
its content. SLB 20, like all staff guidance, has no
legal force or effect: it does not alter or amend
applicable law, and it creates no new or additional
obligations for any person.
6 See Chairman Jay Clayton, Statement
Announcing SEC Staff Roundtable on the Proxy
Process, available at https://www.sec.gov/news/
public-statement/statement-announcing-sec-staffroundtable-proxy-process.
7 See Comments on Statement Announcing SEC
Staff Roundtable on the Proxy Process; File No. 4–
725, available at https://www.sec.gov/comments/4725/4-725.htm.
8 17 CFR 240.14a–2(b).
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II. Interpretation and Guidance
Regarding Applicability of Certain
Federal Proxy Rules to Proxy Voting
Advice
Question 1: Does proxy voting advice
provided by a proxy advisory firm
constitute a solicitation under the
federal proxy rules?
Response: Generally, yes. Exchange
Act Section 14(a) 9 applies to any
solicitation for a proxy with respect to
any security registered under Exchange
Act Section 12 and authorizes the
Commission to establish rules and
regulations governing such solicitations
as necessary or appropriate in the public
interest or for the protection of
investors.10 The Commission defined
the term ‘‘solicitation’’ in Rule 14a–1(l)
under the Exchange Act.11 The
Commission’s definition is broad and
includes, among other things, a
‘‘communication to security holders
under circumstances reasonably
calculated to result in the procurement,
withholding or revocation of a
proxy.’’ 12
9 15 U.S.C. 78n(a). Section 14(a) makes it
‘‘unlawful for any person . . . in contravention of
such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public
interest or for the protection of investors, to solicit
or to permit the use of his name to solicit any proxy
or consent or authorization in respect of any
security . . . registered pursuant to section [12] of
[the Act].’’
10 Foreign private issuers, however, are exempt
from the requirements of Section 14(a). 17
CFR.240.3a12–3(b). In addition, registrants only
reporting pursuant to Exchange Act Section 15(d)
are not subject to the federal proxy rules.
11 17 CFR 240.14a–1(l).
12 17 CFR 240.14a–1(l)(iii). We note that, over the
years, the Commission has broadened the definition
of ‘‘solicitation’’ in the context of what was needed
or appropriate in the public interest or for the
protection of investors, consistent with the
purposes of the Exchange Act. See, e.g., Amended
Proxy Rules, Release No. 1823 (Aug. 11, 1938) [3
FR 1991 (Aug. 13, 1938)]; Amendment of
Regulation X–14, Release No. 2376 (Jan. 12, 1940)
[5 FR 174 (Jan. 12, 1940)] (making clear in each case
that any communication by a person soliciting
proxy authority, not just the communication
delivered with the form of proxy, is a solicitation);
Solicitation of Proxies Under the Act, Release No.
3347 (Dec. 18, 1942) [7 FR 10655 (Dec. 22, 1942)]
(amending the definition of ‘‘solicitation’’ of a
proxy to include ‘‘any request to revoke a proxy or
not to execute a proxy’’); Adoption of Amendments
to Proxy Rules, Release No. 34–5276 (Jan. 17, 1956)
[21 FR 577 (Jan. 26, 1956)] (‘‘Amendments to Proxy
Rules Release’’) (defining a ‘‘solicitation’’ to include
a ‘‘communication to security holders under
circumstances reasonably calculated to result in the
procurement, withholding or revocation of a
proxy’’). The Commission has noted that this
definition potentially applies to, among other
things, communications by those who may not be
seeking proxy authority for themselves or who may
be indifferent to the outcome of a vote. See
Regulation of Communications Among
Shareholders, Release No. 34–31326 (Oct. 16, 1992)
[57 FR 48276 (Oct. 22, 1992)] (‘‘Regulation of
Communications Release’’). In addressing
communications by those who may not be seeking
proxy authority for themselves or who may be
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Consistent with the Commission’s
broad definition of solicitation and the
case law construing that term,13 the
Commission has previously stated that
the federal proxy rules apply to any
person seeking to influence the voting of
proxies by shareholders, regardless of
whether the person itself is seeking
authorization to act as a proxy.14 As a
indifferent to the outcome of a vote, the
Commission did not narrow the definition of
solicitation to exclude these communications, but
instead enacted rules to exempt them from the
information and filing requirements of the federal
proxy rules while preserving the application of the
proxy anti-fraud provision, Rule 14a–9. See, e.g.,
Shareholder Communications, Shareholder
Participation in the Corporate Electoral Process and
Corporate Governance Generally, Release No. 34–
16356 (Nov. 21, 1979) [44 FR 68764 (Nov. 29, 1979)]
(‘‘Shareholder Participation Adopting
Release’’)(exempting the furnishing of proxy voting
advice by any advisor to any other person with
whom the advisor has a business relationship);
Regulation of Communications Release (exempting
communications among shareholders who are not
seeking proxy authority and do not have a
substantial interest in the matter subject to a vote).
13 In considering what constitutes a
‘‘solicitation,’’ courts have similarly taken a broad,
but flexible, view. See, e.g., Union Pacific Railroad
Co. v. Chicago and North Western Railroad Co., 226
F. Supp. 400, 408 (N. D. Ill. 1964) (holding that a
report provided by a broker-dealer to shareholders
of the target company in a contested merger
constituted a solicitation because it advised the
shareholders that one bidder’s offer was ‘‘far more
attractive’’ than the other and therefore was a
communication reasonably calculated to affect the
shareholders’ voting decisions). See also SEC v.
Okin, 132 F.2d 784 (2d Cir. 1943) (holding that the
defendant shareholder who sent a letter to fellow
shareholders in connection with an annual meeting
asking them not to sign any proxies for the
company was engaged in a solicitation); Sargent v.
Genesco, Inc., 492 F.2d 750 (5th Cir. 1974) (holding
that a management letter explaining the
corporation’s recent financial difficulties and
endorsing the terms of a refinancing plan was a
solicitation because its purpose was to forestall the
shareholders from blocking that plan,
notwithstanding that the letter did not expressly
call for any shareholder action); Reserve Life Ins.
Co. v. Provident Life Insurance Co., 499 F.2d 715
(8th Cir. 1974) (holding that letters sent to voting
trust certificate holders to extend the term of a
voting trust were solicitations of proxies).
14 See Amendments to Proxy Rules Release (in
amending the definition of a ‘‘solicitation’’ to
include any communications to security holders
under circumstances reasonably calculated to result
in the procurement, withholding, or revocation of
a proxy, the Commission explained that this
definition may include any statements ‘‘made for
the purpose of inducing security holders to give,
revoke, or withhold a proxy . . . by any person who
has solicited or intends to solicit proxies, whether
or not such statements are accompanied by an
express request to give, revoke, or withhold a
proxy. . .’’); Electronic Shareholder Forums,
Release No. 34–57172 (Jan. 18, 2008) [73 FR 4450
(Jan. 25, 2008)]. See also, Long Island Lighting Co.
v. Barbash, 779 F.2d 793 (2d Cir. 1985) (finding
newspaper and radio advertisements that
encouraged citizens to advocate for a state-run
utility company to be solicitations made in
connection with an upcoming director election
because such advertisements could have indirectly
resulted in the furnishing, revocation, or
withholding of proxies) and Brief of the Securities
and Exchange Commission, Amicus Curiae, at p. 7,
filed therein (‘‘SEC LILCO Brief’’) (‘‘Accordingly,
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result, a person may be engaged in a
solicitation in cases where that person
is not seeking the procurement,
withholding, or revocation of a proxy
for itself. In addition, the Commission
has indicated that this analysis applies
even where the person seeking to
influence the vote may be indifferent to
its ultimate outcome.15 Consistent with
these statements, the Commission has
observed that the breadth of the
definition of ‘‘solicitation’’ may result in
proxy advisory firms being subject to
the proxy rules because they provide
recommendations that are reasonably
calculated to result in the procurement,
withholding, or revocation of a proxy.16
In expressing this view, the Commission
stated that, as a general matter, the
furnishing of proxy voting advice
constitutes a ‘‘solicitation’’ within the
meaning of Exchange Act Rule 14a–1.17
Whether a particular communication
is a solicitation often turns on ‘‘the
purpose for which the communication
was published—i.e., whether the
purpose was to influence the
shareholders’ decisions,’’ as evidenced
by the substance of the communication
and the circumstances under which it
was transmitted.18 With respect to the
substance of the communications, the
proxy voting advice provided by proxy
advisory firms to their clients generally
describes the specific proposals that
will be presented at the registrant’s
upcoming meeting and presents a ‘‘vote
recommendation’’ for each proposal that
indicates how the client should vote.19
the proxy rules apply not only to direct requests to
furnish, revoke or withhold proxies, but also to
communications which may indirectly accomplish
such a result or constitute a step in a chain of
communications designed ultimately to accomplish
such a result.’’).
15 See id.
16 See Concept Release, 75 FR 43009.
17 See id. See also Broker-Dealer Participation in
Proxy Solicitations, Release No. 7208 (Jan. 7, 1964)
[29 FR 341 (Jan. 15, 1964)] (‘‘Broker-Dealer
Release’’). For a discussion of whether proxy voting
advice should be viewed as ‘‘unsolicited’’ proxy
advice, see infra text accompanying notes 26–27.
18 See SEC LILCO Brief (describing the factors
that should be considered in determining whether
an advertisement published in a major newspaper
was reasonably calculated to result in the
procurement, withholding, or revocation of a proxy
and therefore a solicitation).
19 Examples include:
• one proxy advisory firm’s report for a contested
election of directors included a detailed evaluation
of the candidates presented by the dissident
shareholders and management, concluded that
management’s candidate ‘‘appear[ed] to have more
relevant experience than the dissident nominee as
a public company director’’ and recommended that
‘‘[t]herefore a vote FOR the nominee [] on the
management (Blue) card is warranted’’;
• another proxy advisory report analyzed the
registrant’s executive compensation practices and
presented a recommendation to vote ‘‘AGAINST
[the registrant’s advisory vote to ratify named
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These firms often also present their vote
recommendations through online
platforms established by the firms to
facilitate their clients’ proxy voting
activities. With respect to the
circumstances under which this voting
advice is provided, proxy advisory firms
market their expertise in researching
and analyzing matters submitted to a
shareholder vote for the purpose of
assisting their clients in making voting
decisions at shareholder meetings.20
Many investment advisers retain and
pay a fee to proxy advisory firms to
provide detailed analyses of various
issues, including advice regarding how
the investment adviser should vote on
the proposals at the registrant’s
upcoming meeting.21 In many cases, as
discussed below, the proxy advisory
firms make recommendations for a
particular investment adviser based on
the advisory firms’ application of the
investment adviser’s voting criteria.22
executive officers’ compensation]’’ for various
reasons; and
• one proxy advisory firm evaluated a proposal
submitted by a dissident shareholder group to
repeal certain board-adopted bylaw amendments
and recommended that a ‘‘vote AGAINST this
shareholder proposal is warranted as there appears
to be no merit to the dissident campaign.’’
20 For example, one proxy advisor, Institutional
Shareholder Services Inc. (‘‘ISS’’), promotes itself as
‘‘a recognized industry leader in the field of
corporate governance and proxy voting’’ and
explains to investment advisers that they should
consider ISS’ ‘‘proven capacity and competence in
analyzing proxy issues.’’ See ISS, Due Diligence
Compliance Package (November 2017), available at
https://www.issgovernance.com/file/duediligence/
Due-Diligence-Package-November-2017.pdf (last
accessed August 13, 2019).
Another proxy advisor, Glass, Lewis & Co., LLC
(‘‘Glass Lewis’’), describes its business as ‘‘a
leading, independent governance services firm that
provides proxy research and vote management
services to more than 1,300 clients throughout the
world’’ and states that ‘‘[w]hile institutional
investor clients use Glass Lewis research primarily
to help them make proxy voting decisions, they also
use Glass Lewis research when engaging with
companies before and after shareholder meetings.’’
See Best Practice Principles for Providers of
Shareholder Voting Research & Analysis, Glass
Lewis Statement of Compliance for the Period of 1
January 2018 through 31 December 2018, available
at https://www.glasslewis.com/wp-content/uploads/
2019/02/GL-Compliance-Statement-2019.pdf (last
accessed August 13, 2019).
21 As of 2019, ISS reported that it had
approximately 2,000 institutional clients. See
https://www.issgovernance.com/about/about-iss/
(last accessed August 13, 2019). Glass Lewis
reported that, as of 2019, it had ‘‘1,300+ clients,
including the majority of the world’s largest
pension plans, mutual funds, and asset managers,
who collectively manage more than $35 trillion in
assets.’’ See https://www.glasslewis.com/companyoverview/ (last accessed August 13, 2019).
22 See Letter from ISS, dated Nov. 7, 2018 (‘‘ISS
Letter’’) (‘‘[a]s of January 1, 2018, approximately
85% of ISS’ top 100 clients used a custom proxy
voting policy.’’), available at https://www.sec.gov/
comments/4-725/4-725.htm; and Letter from Glass
Lewis, dated Nov. 14, 2018 (‘‘[a]s mentioned above,
the supermajority of Glass Lewis clients . . . vote
according to a custom policy or via a custom
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As a fiduciary, an investment adviser
owes each of its clients a duty of care
and loyalty with respect to services
undertaken on the client’s behalf,
including voting.23 Proxy advisory firms
provide their voting recommendations
to their investment adviser clients with
the expectation that those
recommendations will be used by their
investment adviser clients to assist in
fulfilling their fiduciary duties when
making their voting decisions. The fact
that proxy advisory firms typically
provide their recommendations shortly
before a shareholder meeting further
enhances the likelihood that the
recommendations are designed to and
will influence the final stages of the
investment advisers’ decision-making
process on voting determinations.24
Therefore, it is our view that such
voting advice provided by a firm
marketing its expertise in researching
and analyzing proxy issues for purposes
of helping its clients make proxy voting
determinations (i.e., not merely
performing administrative or ministerial
services) should be considered a
solicitation subject to the federal proxy
rules because it is ‘‘a communication to
security holders under circumstances
reasonably calculated to result in the
procurement, withholding or revocation
of a proxy.’’ We believe this
interpretation is consistent with the
Commission’s long-held view that an
advisor who approaches a customer
with proxy voting advice is engaging in
a solicitation subject to the federal
proxy rules.25
process, in what is becoming the standard practice
among institutional investors.’’), available at
https://www.sec.gov/comments/4-725/4-725.htm.
23 See Investment Adviser Proxy Voting Guidance.
24 See Letter from Center on Executive
Compensation (Nov. 12, 2018) (‘‘. . . proxy reports
are released within a short window before the
issuer’s annual meeting. The data within the reports
is subsequently relied upon by institutional
investors in fulfilling their fiduciary duties to vote
proxies in the best interest of their shareholders.’’).
See also, Frank M. Placenti, Are Proxy Advisors
Really A Problem?, American Council for Capital
Formation (October 2018) (in the 2016 and 2017
proxy seasons, 15.3% and 19.3%, respectively, of
shareholders’ votes were cast within three days
after one proxy advisory firm issued its
recommendations), available at https://accf.org/wpcontent/uploads/2018/10/ACCF_
ProxyProblemReport.pdf; Smallwood v. Pearl
Brewing Co., 489 F.2d 579, 600 (5th Cir. 1974)
(stating that in determining whether a
communication is a solicitation, ‘‘[i]t is important
also to know whether, when the questionable
statement is made, proxies have been requested or
the time for soliciting proxies is near. In general, the
further removed the statement is from an act of
shareholder suffrage, the less likely it is that the
statement will leave its imprint upon that
shareholder action.’’).
25 See Broker-Dealer Release. While the
Commission recognized that proxy voting advice
could be beneficial to shareholders, it nevertheless
did not change its view that such advice would
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Even if the proxy advisory firm is
providing recommendations based on
its application of the client’s own
tailored voting guidelines (i.e., not
merely performing administrative or
ministerial services), and recognizing
that facts and circumstances may vary,
it is our view that such analysis and
advice regarding a voting determination
generally should be considered a
solicitation. The communication
generally is in the form of a voting
recommendation based on the firm’s
analysis of the proxy materials and
whether a particular matter is consistent
with, not consistent with, or not covered
by client voting criteria; it is typically
transmitted to the client shortly before
the meeting to aid the client’s voting
determination; and it may be a factor in
the client’s voting determination. Also,
as noted above, proxy advisory firms
market their services based on their
expertise in researching and analyzing
proxy issues for purposes of helping
their clients make proxy voting
determinations. As a result, even when
based on the client’s own voting
guidelines, we believe the
communication, if it reflects more than
administrative or ministerial work,
should be viewed as part of a
commercial service that is designed to
influence the client’s voting decision.
We believe this to be the case even in
circumstances where the client may not
follow this advice.
For similar reasons, we disagree with
the view that the proxy voting advice
provided by proxy advisory firms falls
outside the definition of a solicitation
because it should not be viewed as
likely fall within the definition of a solicitation and
instead chose to exempt such solicitations from the
information and filing requirements of the proxy
rules. See, generally, Shareholder Participation
Adopting Release, enacting what is now Exchange
Act Rule 14a–2(b)(3) [17 CFR 240.14a–2(b)(3)] to
exempt the furnishing of proxy voting advice by
any advisor to any other person with whom the
advisor has a business relationship from the
informational and filing requirements of the federal
proxy rules, provided the conditions of the rule are
met. Rule 14a–2(b)(3) requires that:
(i) the advisor renders financial advice in the
ordinary course of his business;
(ii) the advisor discloses to the recipient of the
advice any significant relationship with the
registrant or any of its affiliates, or a security holder
proponent of the matter on which advice is given,
as well as any material interests of the advisor in
such matter;
(iii) the advisor receives no special commission
or remuneration for furnishing the proxy voting
advice from any person other than a recipient of the
advice and other persons who receive similar
advice under this subsection; and
(iv) the proxy voting advice is not furnished on
behalf of any person soliciting proxies or on behalf
of a participant in an election subject to the
provisions of Exchange Act Rule 14a–12(c).) [17
CFR 240.14a–12(c)].
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‘‘unsolicited’’ voting advice.26 We view
these services provided by proxy
advisory firms as distinct from advice
prompted by unsolicited inquiries from
clients to their financial advisors or
brokers on how they should vote their
proxies, which remains outside the
definition of a solicitation.27 Rather
than merely responding to client
inquiries, the communication is invited
by the proxy advisory firms themselves
through the marketing of their expertise
in researching and analyzing proxy
issues for purposes of helping clients
make proxy voting determinations.
Notwithstanding the foregoing, we
note that persons engaged in a
solicitation in the form of proxy voting
advice, including proxy advisory firms,
may avail themselves of the exemptions
from the information and filing
requirements of the federal proxy
rules.28 Nothing in this interpretation is
intended to restrict or limit reliance on
those exemptions.
Question 2: Does Exchange Act Rule
14a–9 apply to proxy voting advice?
Response: Yes. Solicitations that are
exempt from the federal proxy rules’
information and filing requirements
remain subject to Exchange Act Rule
14a–9, which prohibits any solicitation
from containing any statement which, at
the time and in the light of the
circumstances under which it is made,
is false or misleading with respect to
any material fact.29 In addition, such
solicitation must not omit to state any
material fact necessary in order to make
the statements therein not false or
misleading.30 Rule 14a–9 also extends to
opinions, reasons, recommendations, or
beliefs that are disclosed as part of a
solicitation, which may be statements of
material facts for purposes of the rule.31
26 See ISS Letter (distinguishing between
unsolicited and solicited proxy advice and
requesting that the Commission confirm that while
unsolicited proxy advice is a solicitation, a
registered investment adviser who is contractually
obligated to furnish vote recommendations based
on client-selected guidelines does not provide
‘‘unsolicited’’ proxy voting advice, and therefore
does not engage in a solicitation).
27 See Broker-Dealer Release (setting forth the
opinion of the SEC’s General Counsel that a broker
is not engaging in a ‘‘solicitation’’ if it is merely
responding to his customer’s request for advice and
‘‘not actively initiating the communication’’).
28 See, e.g., 17 CFR 240.14a–2(b)(1) and 17 CFR
240.14a–2(b)(3).
29 See 17 CFR 240.14a–9. See also, Concept
Release, 75 FR 43010 (‘‘Even if exempt from the
informational and filing requirements of the federal
proxy rules, the furnishing of proxy voting advice
remains subject to the prohibition on false and
misleading statements in Rule 14a–9.’’).
30 17 CFR 240.14a–9.
31 See Virginia Bankshares, Inc. v. Sandberg, 501
U.S. 1083, 1092 (1991) (stating that a board’s
recommendation that shareholders approve a
proposed merger because it viewed the proposal as
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Where such opinions,
recommendations, or similar views are
provided, disclosure of the underlying
facts, assumptions, limitations, and
other information may be needed so that
these views do not raise Rule 14a–9
concerns.32 Accordingly, any person
engaged in a solicitation through proxy
voting advice must not make materially
false or misleading statements or omit
material facts, such as information
underlying the basis of its advice or
which would affect its analysis and
judgments, that would be required to
make the advice not misleading. For
example, the provider of the proxy
voting advice should consider whether,
depending on the particular statement,
it may need to disclose the following
types of information in order to avoid a
potential violation of Rule 14a–9: 33
• An explanation of the methodology
used to formulate its voting advice on a
particular matter (including any
material deviations from the provider’s
publicly-announced guidelines,
policies, or standard methodologies for
analyzing such matters) where the
omission of such information would
render the voting advice materially false
or misleading; 34
‘‘fair’’ to the minority shareholders and the offered
merger consideration as a ‘‘high’’ value were
statements of material facts because ‘‘[s]uch
statements are factual in two senses: As statements
that the directors do act for the reasons given or
hold the belief stated and as statements about the
subject matter of the reason or belief expressed’’).
32 See, e.g., Dowling v. Narragansett Capital
Corp., 735 F. Supp. 1105, 1119 (D.R.I. 1990)
(denying a motion to dismiss Rule 14a–9
complaints on the basis that ‘‘allegations regarding
misrepresentations as to the value of . . . [a
corporation’s assets] and nondisclosure of the
limitations on the information underlying . . . [a]
fairness opinion implicate matters at the heart of
the decision confronting shareholders.’’). The
Commission staff has previously raised questions
about the appropriateness and adequacy of
disclosure under Rule 14a–9 in proxy solicitations.
See, e.g., Interpretative Release Relating to Proxy
Rules, Release No. 34–16833 (May 23, 1980) [45 FR
36374 (May 30, 1980)] (stating the Division of
Corporation Finance’s view that in proxy contests
in which the disposition of a registrant’s assets and
distribution of the sale proceeds to shareholders
were the dissidents’ goal, the inclusion of
valuations of the sale proceeds in the proxy
soliciting material was only appropriate under Rule
14a–9 when, among other things, they were
‘‘accompanied by disclosure which facilitate[d]
shareholders’ understanding of the basis for and the
limitations on the projected realizable values.’’).
33 We understand that some proxy advisory firms
currently may be providing some of the disclosures
described in the examples listed in this section.
34 To the extent that the proxy voting advice is
materially based on a methodology using a group
of peer companies selected by the proxy advisory
firm, the disclosure may need to include the
identities of the peer group members used as part
of its recommendation and the reasons for selecting
these peer group members as well as, if material,
why its peer group members differ from those
selected by the registrant. For example, such
disclosure may be needed for a voting
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47419
• to the extent that the proxy voting
advice is based on information other
than the registrant’s public disclosures,
such as third-party information
sources,35 disclosure about these
information sources and the extent to
which the information from these
sources differs from the public
disclosures provided by the registrant if
such differences are material and the
failure to disclose the differences would
render the voting advice false or
misleading; and
• disclosure about material conflicts
of interest that arise in connection with
providing the proxy voting advice in
reasonably sufficient detail so that the
client can assess the relevance of those
conflicts.36
III. Other Matters
Pursuant to the Congressional Review
Act,37 the Office of Information and
Regulatory Affairs has designated this
guidance and interpretation as not a
‘‘major rule,’’ as defined by 5 U.S.C.
804(2).
List of Subjects in 17 CFR Part 241
Securities.
Amendments to the Code of Federal
Regulations
For the reasons set out above, the
Commission is amending title 17,
chapter II of the Code of Federal
Regulations as set forth below:
PART 241—INTERPRETATIVE
RELEASES RELATING TO THE
SECURITIES EXCHANGE ACT OF 1934
AND GENERAL RULES AND
REGULATIONS THEREUNDER
1. An authority citation is added for
part 241 to read as follows:
■
Authority: 15 U.S.C. 78a et seq.
2. The table is amended by adding an
entry for Release No. 34–86721 at the
end to read as follows:
■
recommendation on a registrant’s advisory vote on
an executive compensation proposal that is based
on a comparison of the registrant’s executive
compensation policies to those of other companies
selected by the proxy advisory firm.
35 Such sources could include third-party
research or publications, commercial or financial
information databases, or ratings or rankings
published by third parties.
36 Relationships or interests that may create
conflicts of interest are commonly found by courts
as material information that should be disclosed to
avoid Rule 14a–9 violations. See, e.g., Maldonado
v. Flynn, 597 F.2d 789 (2d Cir. 1979) (noting that
‘‘shareholders are entitled to truthful presentation
of factual information’’ when there is a possibility
of self-dealing among directors and emphasizing the
importance of Rule 14a–9 in eliciting disclosures of
this material information).
37 5 U.S.C. 801 et seq.
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Federal Register / Vol. 84, No. 175 / Tuesday, September 10, 2019 / Rules and Regulations
Subject
Release No.
*
*
*
*
Commission Interpretation and Guidance Regarding the Applicability
of the Proxy Rules to Proxy Voting Advice.
By the Commission.
Dated: August 21, 2019.
Vanessa A. Countryman,
Secretary.
Fed. Reg. vol. and page
*
August 21, 2019
*
*
[Insert FR Volume Number] FR [Insert FR Page Number].
Form N–3,4 and Form N–CSR 5 under
the Investment Company Act [15 U.S.C.
80a].6
Table of Contents
[FR Doc. 2019–18355 Filed 9–9–19; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
I. Introduction
II. Guidance Regarding Investment Advisers’
Proxy Voting Responsibilities and
Disclosures on Form N–1A, Form N–2,
Form N–3, and Form N–CSR
III. Other Matters
17 CFR Parts 271 and 276
I. Introduction
BILLING CODE 8011–01–P
[Release Nos. IA–5325; IC–33605]
Commission Guidance Regarding
Proxy Voting Responsibilities of
Investment Advisers
Securities and Exchange
Commission.
ACTION: Guidance.
AGENCY:
The Securities and Exchange
Commission (the ‘‘SEC’’ or the
‘‘Commission’’) is publishing guidance
regarding the proxy voting
responsibilities of investment advisers
under its regulations issued under the
Investment Advisers Act of 1940 (the
‘‘Advisers Act’’), and Form N–1A, Form
N–2, Form N–3, and Form N–CSR under
the Investment Company Act of 1940
(the ‘‘Investment Company Act’’).
DATES: Effective: September 10, 2019.
FOR FURTHER INFORMATION CONTACT:
Thankam A. Varghese, Senior Counsel;
or Holly Hunter-Ceci, Assistant Chief
Counsel, at (202) 551–6825 or IMOCC@
sec.gov, Chief Counsel’s Office, Division
of Investment Management, Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is publishing guidance
regarding the proxy voting
responsibilities of investment advisers
under 17 CFR 275.206(4)–6 [Rule
206(4)–6 under the Advisers Act [15
U.S.C. 80b]],1 Form N–1A,2 Form N–2,3
SUMMARY:
khammond on DSKBBV9HB2PROD with RULES
34–86721
Date
1 Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act,
we are referring to 15 U.S.C. 80b of the United
States Code, at which the Advisers Act is codified,
and when we refer to rules under the Advisers Act,
or any paragraph of these rules, we are referring to
title 17, part 275 of the Code of Federal Regulations
[17 CFR part 275], in which these rules are
published.
2 Referenced in 17 CFR 274.11A.
3 Referenced in 17 CFR 274.11a–1.
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Investment advisers regularly are
faced with an array of decisions
regarding voting of equity securities on
behalf of their clients, whether those
clients are individual investors, funds or
other institutional investors.7 In various
contexts, and in respect of a wide range
of matters submitted to shareholders for
a vote, investment advisers that have
agreed to take on proxy voting authority
are called upon to make voting
determinations.
4 Referenced
in 17 CFR 274.11b.
in 17 CFR 274.128.
6 Unless otherwise noted, when we refer to the
Investment Company Act, or any paragraph of the
Investment Company Act, we are referring to 15
U.S.C. 80a of the United States Code, at which the
Investment Company Act is codified, and when we
refer to rules under the Investment Company Act,
or any paragraph of these rules, we are referring to
title 17, part 270 of the Code of Federal Regulations
[17 CFR part 270], in which these rules are
published.
7 Investment advisers owe each of their clients a
fiduciary duty under the Advisers Act, which
‘‘must be viewed in the context of the agreed-upon
scope of the relationship between the adviser and
the client.’’ Commission Interpretation Regarding
Standard of Conduct for Investment Advisers,
Release No. IA–5248 (June 5, 2019), 84 FR 33669,
at 33671 (July 12, 2019) (‘‘Fiduciary
Interpretation’’). In the case of a registered
investment company (‘‘fund’’), the scope of this
relationship is defined by the advisory agreement
between the investment adviser and its client (i.e.,
the fund), and the fund board has the authority to
set the scope of voting authority in accordance with
its fiduciary duty. With respect to funds, the
Investment Company Institute noted that a fund
board typically delegates its proxy voting duties to
the fund’s investment adviser. During the 2017
proxy season, funds cast more than 7.6 million
votes for proxy proposals, and the average fund
voted on 1,504 separate proxy proposals for U.S.
listed portfolio companies (figures exclude
companies domiciled outside the United States.).
See Letter dated Mar. 15, 2019 from Paul Schott
Stevens, President and CEO, Investment Company
Institute (‘‘ICI Letter II’’) at p. 3. Unless otherwise
noted, letters cited herein were submitted in
response to the Statement Announcing SEC Staff
Roundtable on the Proxy Process, July 30, 2018
available at https://www.sec.gov/comments/4-725/
4-725.htm.
5 Referenced
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In general, matters are put forth for a
shareholder vote either by the issuer 8 or
by a shareholder or group of
shareholders. The submission of matters
for a vote by shareholders typically
occurs in connection with a meeting of
shareholders, including annual
shareholder meetings and special
shareholder meetings.9 Some matters
appear regularly and consistently at
each annual meeting of shareholders,
such as the shareholder vote on whether
to ratify the issuer’s selection of an
outside auditor.10 Other matters, such as
shareholder votes on proposed mergers,
acquisitions, or other corporate actions
and matters proposed by a shareholder
or group of shareholders, are generally
more idiosyncratic in substance and
timing.
Investment advisers are fiduciaries
that owe each of their clients duties of
care and loyalty with respect to services
undertaken on the client’s behalf,
including voting.11 In the context of
voting, the specific obligations that flow
from the investment adviser’s fiduciary
duty depend upon the scope of voting
authority assumed by the adviser.12 To
satisfy its fiduciary duty in making any
voting determination, the investment
adviser must make the determination in
the best interest of the client and must
not place the investment adviser’s own
interests ahead of the interests of the
client.
Specifically, an investment adviser’s
duty of care includes, among other
things, the duty to provide advice that
8 As used in this Release, the terms ‘‘company’’
and ‘‘issuer’’ refer to the issuer of the securities for
which proxies are solicited.
9 Concept Release on the U.S. Proxy System,
Release No. 34–62495 (July 14, 2010), 75 FR 42982
(July 22, 2010) (‘‘Concept Release’’).
10 Many of these matters are required to be
submitted to shareholders as a result of federal law,
state law, exchange requirements or the company’s
governance documents. See, e.g., Section 14A(a) of
the Securities Exchange Act of 1934 (‘‘say-on-pay’’
votes); 8 Del. C. 1953, sec. 211 (annual meeting to
elect directors); NYSE Listed Company Manual
Section 312.03(b) (shareholder approval for certain
related party transactions involving issuances of
common stock); and NASDAQ Rule 5635(a)
(shareholder approval is required in certain
instances prior to the issuance of securities in
connection with the acquisition of the stock or
assets of another company).
11 See Fiduciary Interpretation, 84 FR 33669, at n.
32.
12 See Fiduciary Interpretation, 84 FR 33669, at
33671–72.
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]]>Agencies
[Federal Register Volume 84, Number 175 (Tuesday, September 10, 2019)]
[Rules and Regulations]
[Pages 47416-47420]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18355]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 241
[Release No. 34-86721]
Commission Interpretation and Guidance Regarding the
Applicability of the Proxy Rules to Proxy Voting Advice
AGENCY: Securities and Exchange Commission.
ACTION: Guidance and interpretation.
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SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the
``Commission'') is providing an interpretation and related guidance
regarding the applicability of certain rules, which the Commission has
promulgated under Section 14 of the Securities Exchange Act of 1934
(the ``Exchange Act'' and such rules the ``federal proxy rules''), to
proxy voting advice.
DATES: Effective: September 10, 2019.
FOR FURTHER INFORMATION CONTACT: Adam F. Turk, Special Counsel, at
(202) 551-3500, Office of Chief Counsel, Division of Corporation
Finance, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is providing an
interpretation and related guidance regarding the applicability of 17
CFR 240.14-1 and 240.14a-9 [Rules 14a-1 and 14a-9] under the Exchange
Act [15 U.S.C. 78a et seq.] to proxy voting advice.\1\
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\1\ Unless otherwise noted, when we refer to the Exchange Act,
or any paragraph of the Exchange Act, we are referring to 15 U.S.C.
78a, at which the Exchange Act is codified, and when we refer to
rules under the Exchange Act, or any paragraph of these rules, we
are referring to Title 17, part 240 of the Code of Federal
Regulations [17 CFR part 240], in which these rules are published.
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Table of Contents
I. Introduction
II. Interpretation and Guidance Regarding Applicability of Certain
Federal Proxy Rules to Proxy Voting Advice
III. Other Matters
I. Introduction
As the use of proxy advisory firms by investment advisers and other
institutional investors has become more widespread and the services
offered by proxy advisory firms have broadened, we and our staff have
examined how proxy voting advice provided by proxy advisory firms may
be solicitations under the federal proxy rules.\2\ In addition, we and
our staff have engaged with the public through various forums and
statements on a variety of issues related to the proxy voting process,
including those discussed below. For example, in 2010, the Commission
issued a concept release that sought public comment about, among other
things, the role and legal status of proxy advisory firms within the
U.S. proxy system.\3\ In 2013, the staff held a roundtable on the use
of proxy advisory firm services by institutional investors and
investment advisers.\4\ In 2014, the staff of the Divisions of
Investment Management and Corporation Finance issued a Staff Legal
Bulletin (``SLB 20'') to provide guidance about the availability and
requirements of two exemptions to the federal proxy rules that are
often relied upon by proxy advisory firms.\5\ Most recently, the staff
hosted a roundtable on the proxy process in November 2018 (the ``2018
Roundtable'') that included a panel on the role of proxy advisory firms
and their use by investment advisers.\6\ In connection with the 2018
Roundtable, the public was invited to provide input on questions that
arise regarding the use of proxy advisory firms and their
activities.\7\ We have carefully considered the feedback received on
these topics, and with the benefit of this extensive body of
information, historical experience, and engagement, the Commission is
today providing an interpretation and related guidance regarding the
applicability of the federal proxy rules to proxy voting advice
provided by proxy advisory firms.
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\2\ The Commission today is also publishing guidance regarding
the proxy voting responsibilities of investment advisers under Rule
206(4)-6 under the Investment Advisers Act of 1940, Form N-1A, Form
N-2, Form N-3, and Form N-CSR under the Investment Company Act of
1940. See Commission Guidance Regarding Proxy Voting
Responsibilities of Investment Advisers, Release No. IA-5325 (August
21, 2019) [ FR ] (``Investment Adviser Proxy Voting Guidance'').
\3\ Concept Release on the U.S. Proxy System, Release No. 34-
62495 (July 14, 2010) [75 FR 42982 (July 22, 2010)] (``Concept
Release''). The comment letters received in response to the Concept
Release are available at https://www.sec.gov/comments/s7-14-10/s71410.shtml.
\4\ See SEC Announces Agenda, Panelists for Roundtable on Proxy
Advisory Services, available at https://www.sec.gov/news/press-release/2013-253. The letters received in response to the
announcement are available at https://www.sec.gov/comments/4-670/4-670.shtml.
\5\ SEC Staff Legal Bulletin No. 20, Proxy Voting: Proxy Voting
Responsibilities of Investment Advisers and Availability of
Exemptions from the Proxy Rules for Proxy Advisory Firms (June 30,
2014). SLB 20 represents the views of the staff of the Divisions of
Investment Management and Corporation Finance. It is not a rule,
regulation, or statement of the Commission. Furthermore, the
Commission has neither approved nor disapproved its content. SLB 20,
like all staff guidance, has no legal force or effect: it does not
alter or amend applicable law, and it creates no new or additional
obligations for any person.
\6\ See Chairman Jay Clayton, Statement Announcing SEC Staff
Roundtable on the Proxy Process, available at https://www.sec.gov/news/public-statement/statement-announcing-sec-staff-roundtable-proxy-process.
\7\ See Comments on Statement Announcing SEC Staff Roundtable on
the Proxy Process; File No. 4-725, available at https://www.sec.gov/comments/4-725/4-725.htm.
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Specifically, in Section II below, we provide an interpretation and
related guidance on whether proxy voting advice constitutes a
``solicitation'' under the federal proxy rules, and the application of
Rule 14a-9 under the Exchange Act to proxy voting advice. The
interpretation and related guidance discussed below are part of the
Commission's review of the overall proxy process. As part of this
effort, the staff is also considering recommending that the Commission
propose rule amendments to address proxy advisory firms' reliance on
the proxy solicitation exemptions in Exchange Act Rule 14a-2(b).\8\
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\8\ 17 CFR 240.14a-2(b).
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* * * * *
[[Page 47417]]
II. Interpretation and Guidance Regarding Applicability of Certain
Federal Proxy Rules to Proxy Voting Advice
Question 1: Does proxy voting advice provided by a proxy advisory
firm constitute a solicitation under the federal proxy rules?
Response: Generally, yes. Exchange Act Section 14(a) \9\ applies to
any solicitation for a proxy with respect to any security registered
under Exchange Act Section 12 and authorizes the Commission to
establish rules and regulations governing such solicitations as
necessary or appropriate in the public interest or for the protection
of investors.\10\ The Commission defined the term ``solicitation'' in
Rule 14a-1(l) under the Exchange Act.\11\ The Commission's definition
is broad and includes, among other things, a ``communication to
security holders under circumstances reasonably calculated to result in
the procurement, withholding or revocation of a proxy.'' \12\
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\9\ 15 U.S.C. 78n(a). Section 14(a) makes it ``unlawful for any
person . . . in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors, to solicit or to permit
the use of his name to solicit any proxy or consent or authorization
in respect of any security . . . registered pursuant to section [12]
of [the Act].''
\10\ Foreign private issuers, however, are exempt from the
requirements of Section 14(a). 17 CFR.240.3a12-3(b). In addition,
registrants only reporting pursuant to Exchange Act Section 15(d)
are not subject to the federal proxy rules.
\11\ 17 CFR 240.14a-1(l).
\12\ 17 CFR 240.14a-1(l)(iii). We note that, over the years, the
Commission has broadened the definition of ``solicitation'' in the
context of what was needed or appropriate in the public interest or
for the protection of investors, consistent with the purposes of the
Exchange Act. See, e.g., Amended Proxy Rules, Release No. 1823 (Aug.
11, 1938) [3 FR 1991 (Aug. 13, 1938)]; Amendment of Regulation X-14,
Release No. 2376 (Jan. 12, 1940) [5 FR 174 (Jan. 12, 1940)] (making
clear in each case that any communication by a person soliciting
proxy authority, not just the communication delivered with the form
of proxy, is a solicitation); Solicitation of Proxies Under the Act,
Release No. 3347 (Dec. 18, 1942) [7 FR 10655 (Dec. 22, 1942)]
(amending the definition of ``solicitation'' of a proxy to include
``any request to revoke a proxy or not to execute a proxy'');
Adoption of Amendments to Proxy Rules, Release No. 34-5276 (Jan. 17,
1956) [21 FR 577 (Jan. 26, 1956)] (``Amendments to Proxy Rules
Release'') (defining a ``solicitation'' to include a ``communication
to security holders under circumstances reasonably calculated to
result in the procurement, withholding or revocation of a proxy'').
The Commission has noted that this definition potentially applies
to, among other things, communications by those who may not be
seeking proxy authority for themselves or who may be indifferent to
the outcome of a vote. See Regulation of Communications Among
Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 FR 48276
(Oct. 22, 1992)] (``Regulation of Communications Release''). In
addressing communications by those who may not be seeking proxy
authority for themselves or who may be indifferent to the outcome of
a vote, the Commission did not narrow the definition of solicitation
to exclude these communications, but instead enacted rules to exempt
them from the information and filing requirements of the federal
proxy rules while preserving the application of the proxy anti-fraud
provision, Rule 14a-9. See, e.g., Shareholder Communications,
Shareholder Participation in the Corporate Electoral Process and
Corporate Governance Generally, Release No. 34-16356 (Nov. 21, 1979)
[44 FR 68764 (Nov. 29, 1979)] (``Shareholder Participation Adopting
Release'')(exempting the furnishing of proxy voting advice by any
advisor to any other person with whom the advisor has a business
relationship); Regulation of Communications Release (exempting
communications among shareholders who are not seeking proxy
authority and do not have a substantial interest in the matter
subject to a vote).
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Consistent with the Commission's broad definition of solicitation
and the case law construing that term,\13\ the Commission has
previously stated that the federal proxy rules apply to any person
seeking to influence the voting of proxies by shareholders, regardless
of whether the person itself is seeking authorization to act as a
proxy.\14\ As a result, a person may be engaged in a solicitation in
cases where that person is not seeking the procurement, withholding, or
revocation of a proxy for itself. In addition, the Commission has
indicated that this analysis applies even where the person seeking to
influence the vote may be indifferent to its ultimate outcome.\15\
Consistent with these statements, the Commission has observed that the
breadth of the definition of ``solicitation'' may result in proxy
advisory firms being subject to the proxy rules because they provide
recommendations that are reasonably calculated to result in the
procurement, withholding, or revocation of a proxy.\16\ In expressing
this view, the Commission stated that, as a general matter, the
furnishing of proxy voting advice constitutes a ``solicitation'' within
the meaning of Exchange Act Rule 14a-1.\17\
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\13\ In considering what constitutes a ``solicitation,'' courts
have similarly taken a broad, but flexible, view. See, e.g., Union
Pacific Railroad Co. v. Chicago and North Western Railroad Co., 226
F. Supp. 400, 408 (N. D. Ill. 1964) (holding that a report provided
by a broker-dealer to shareholders of the target company in a
contested merger constituted a solicitation because it advised the
shareholders that one bidder's offer was ``far more attractive''
than the other and therefore was a communication reasonably
calculated to affect the shareholders' voting decisions). See also
SEC v. Okin, 132 F.2d 784 (2d Cir. 1943) (holding that the defendant
shareholder who sent a letter to fellow shareholders in connection
with an annual meeting asking them not to sign any proxies for the
company was engaged in a solicitation); Sargent v. Genesco, Inc.,
492 F.2d 750 (5th Cir. 1974) (holding that a management letter
explaining the corporation's recent financial difficulties and
endorsing the terms of a refinancing plan was a solicitation because
its purpose was to forestall the shareholders from blocking that
plan, notwithstanding that the letter did not expressly call for any
shareholder action); Reserve Life Ins. Co. v. Provident Life
Insurance Co., 499 F.2d 715 (8th Cir. 1974) (holding that letters
sent to voting trust certificate holders to extend the term of a
voting trust were solicitations of proxies).
\14\ See Amendments to Proxy Rules Release (in amending the
definition of a ``solicitation'' to include any communications to
security holders under circumstances reasonably calculated to result
in the procurement, withholding, or revocation of a proxy, the
Commission explained that this definition may include any statements
``made for the purpose of inducing security holders to give, revoke,
or withhold a proxy . . . by any person who has solicited or intends
to solicit proxies, whether or not such statements are accompanied
by an express request to give, revoke, or withhold a proxy. . .'');
Electronic Shareholder Forums, Release No. 34-57172 (Jan. 18, 2008)
[73 FR 4450 (Jan. 25, 2008)]. See also, Long Island Lighting Co. v.
Barbash, 779 F.2d 793 (2d Cir. 1985) (finding newspaper and radio
advertisements that encouraged citizens to advocate for a state-run
utility company to be solicitations made in connection with an
upcoming director election because such advertisements could have
indirectly resulted in the furnishing, revocation, or withholding of
proxies) and Brief of the Securities and Exchange Commission, Amicus
Curiae, at p. 7, filed therein (``SEC LILCO Brief'') (``Accordingly,
the proxy rules apply not only to direct requests to furnish, revoke
or withhold proxies, but also to communications which may indirectly
accomplish such a result or constitute a step in a chain of
communications designed ultimately to accomplish such a result.'').
\15\ See id.
\16\ See Concept Release, 75 FR 43009.
\17\ See id. See also Broker-Dealer Participation in Proxy
Solicitations, Release No. 7208 (Jan. 7, 1964) [29 FR 341 (Jan. 15,
1964)] (``Broker-Dealer Release''). For a discussion of whether
proxy voting advice should be viewed as ``unsolicited'' proxy
advice, see infra text accompanying notes 26-27.
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Whether a particular communication is a solicitation often turns on
``the purpose for which the communication was published--i.e., whether
the purpose was to influence the shareholders' decisions,'' as
evidenced by the substance of the communication and the circumstances
under which it was transmitted.\18\ With respect to the substance of
the communications, the proxy voting advice provided by proxy advisory
firms to their clients generally describes the specific proposals that
will be presented at the registrant's upcoming meeting and presents a
``vote recommendation'' for each proposal that indicates how the client
should vote.\19\
[[Page 47418]]
These firms often also present their vote recommendations through
online platforms established by the firms to facilitate their clients'
proxy voting activities. With respect to the circumstances under which
this voting advice is provided, proxy advisory firms market their
expertise in researching and analyzing matters submitted to a
shareholder vote for the purpose of assisting their clients in making
voting decisions at shareholder meetings.\20\ Many investment advisers
retain and pay a fee to proxy advisory firms to provide detailed
analyses of various issues, including advice regarding how the
investment adviser should vote on the proposals at the registrant's
upcoming meeting.\21\ In many cases, as discussed below, the proxy
advisory firms make recommendations for a particular investment adviser
based on the advisory firms' application of the investment adviser's
voting criteria.\22\
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\18\ See SEC LILCO Brief (describing the factors that should be
considered in determining whether an advertisement published in a
major newspaper was reasonably calculated to result in the
procurement, withholding, or revocation of a proxy and therefore a
solicitation).
\19\ Examples include:
one proxy advisory firm's report for a contested
election of directors included a detailed evaluation of the
candidates presented by the dissident shareholders and management,
concluded that management's candidate ``appear[ed] to have more
relevant experience than the dissident nominee as a public company
director'' and recommended that ``[t]herefore a vote FOR the nominee
[] on the management (Blue) card is warranted'';
another proxy advisory report analyzed the registrant's
executive compensation practices and presented a recommendation to
vote ``AGAINST [the registrant's advisory vote to ratify named
executive officers' compensation]'' for various reasons; and
one proxy advisory firm evaluated a proposal submitted
by a dissident shareholder group to repeal certain board-adopted
bylaw amendments and recommended that a ``vote AGAINST this
shareholder proposal is warranted as there appears to be no merit to
the dissident campaign.''
\20\ For example, one proxy advisor, Institutional Shareholder
Services Inc. (``ISS''), promotes itself as ``a recognized industry
leader in the field of corporate governance and proxy voting'' and
explains to investment advisers that they should consider ISS'
``proven capacity and competence in analyzing proxy issues.'' See
ISS, Due Diligence Compliance Package (November 2017), available at
https://www.issgovernance.com/file/duediligence/Due-Diligence-Package-November-2017.pdf (last accessed August 13, 2019).
Another proxy advisor, Glass, Lewis & Co., LLC (``Glass
Lewis''), describes its business as ``a leading, independent
governance services firm that provides proxy research and vote
management services to more than 1,300 clients throughout the
world'' and states that ``[w]hile institutional investor clients use
Glass Lewis research primarily to help them make proxy voting
decisions, they also use Glass Lewis research when engaging with
companies before and after shareholder meetings.'' See Best Practice
Principles for Providers of Shareholder Voting Research & Analysis,
Glass Lewis Statement of Compliance for the Period of 1 January 2018
through 31 December 2018, available at https://www.glasslewis.com/wp-content/uploads/2019/02/GL-Compliance-Statement-2019.pdf (last
accessed August 13, 2019).
\21\ As of 2019, ISS reported that it had approximately 2,000
institutional clients. See https://www.issgovernance.com/about/about-iss/ (last accessed August 13, 2019). Glass Lewis reported
that, as of 2019, it had ``1,300+ clients, including the majority of
the world's largest pension plans, mutual funds, and asset managers,
who collectively manage more than $35 trillion in assets.'' See
https://www.glasslewis.com/company-overview/ (last accessed August
13, 2019).
\22\ See Letter from ISS, dated Nov. 7, 2018 (``ISS Letter'')
(``[a]s of January 1, 2018, approximately 85% of ISS' top 100
clients used a custom proxy voting policy.''), available at https://www.sec.gov/comments/4-725/4-725.htm; and Letter from Glass Lewis,
dated Nov. 14, 2018 (``[a]s mentioned above, the supermajority of
Glass Lewis clients . . . vote according to a custom policy or via a
custom process, in what is becoming the standard practice among
institutional investors.''), available at https://www.sec.gov/comments/4-725/4-725.htm.
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As a fiduciary, an investment adviser owes each of its clients a
duty of care and loyalty with respect to services undertaken on the
client's behalf, including voting.\23\ Proxy advisory firms provide
their voting recommendations to their investment adviser clients with
the expectation that those recommendations will be used by their
investment adviser clients to assist in fulfilling their fiduciary
duties when making their voting decisions. The fact that proxy advisory
firms typically provide their recommendations shortly before a
shareholder meeting further enhances the likelihood that the
recommendations are designed to and will influence the final stages of
the investment advisers' decision-making process on voting
determinations.\24\ Therefore, it is our view that such voting advice
provided by a firm marketing its expertise in researching and analyzing
proxy issues for purposes of helping its clients make proxy voting
determinations (i.e., not merely performing administrative or
ministerial services) should be considered a solicitation subject to
the federal proxy rules because it is ``a communication to security
holders under circumstances reasonably calculated to result in the
procurement, withholding or revocation of a proxy.'' We believe this
interpretation is consistent with the Commission's long-held view that
an advisor who approaches a customer with proxy voting advice is
engaging in a solicitation subject to the federal proxy rules.\25\
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\23\ See Investment Adviser Proxy Voting Guidance.
\24\ See Letter from Center on Executive Compensation (Nov. 12,
2018) (``. . . proxy reports are released within a short window
before the issuer's annual meeting. The data within the reports is
subsequently relied upon by institutional investors in fulfilling
their fiduciary duties to vote proxies in the best interest of their
shareholders.'').
See also, Frank M. Placenti, Are Proxy Advisors Really A
Problem?, American Council for Capital Formation (October 2018) (in
the 2016 and 2017 proxy seasons, 15.3% and 19.3%, respectively, of
shareholders' votes were cast within three days after one proxy
advisory firm issued its recommendations), available at https://accf.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport.pdf;
Smallwood v. Pearl Brewing Co., 489 F.2d 579, 600 (5th Cir. 1974)
(stating that in determining whether a communication is a
solicitation, ``[i]t is important also to know whether, when the
questionable statement is made, proxies have been requested or the
time for soliciting proxies is near. In general, the further removed
the statement is from an act of shareholder suffrage, the less
likely it is that the statement will leave its imprint upon that
shareholder action.'').
\25\ See Broker-Dealer Release. While the Commission recognized
that proxy voting advice could be beneficial to shareholders, it
nevertheless did not change its view that such advice would likely
fall within the definition of a solicitation and instead chose to
exempt such solicitations from the information and filing
requirements of the proxy rules. See, generally, Shareholder
Participation Adopting Release, enacting what is now Exchange Act
Rule 14a-2(b)(3) [17 CFR 240.14a-2(b)(3)] to exempt the furnishing
of proxy voting advice by any advisor to any other person with whom
the advisor has a business relationship from the informational and
filing requirements of the federal proxy rules, provided the
conditions of the rule are met. Rule 14a-2(b)(3) requires that:
(i) the advisor renders financial advice in the ordinary course
of his business;
(ii) the advisor discloses to the recipient of the advice any
significant relationship with the registrant or any of its
affiliates, or a security holder proponent of the matter on which
advice is given, as well as any material interests of the advisor in
such matter;
(iii) the advisor receives no special commission or remuneration
for furnishing the proxy voting advice from any person other than a
recipient of the advice and other persons who receive similar advice
under this subsection; and
(iv) the proxy voting advice is not furnished on behalf of any
person soliciting proxies or on behalf of a participant in an
election subject to the provisions of Exchange Act Rule 14a-12(c).)
[17 CFR 240.14a-12(c)].
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Even if the proxy advisory firm is providing recommendations based
on its application of the client's own tailored voting guidelines
(i.e., not merely performing administrative or ministerial services),
and recognizing that facts and circumstances may vary, it is our view
that such analysis and advice regarding a voting determination
generally should be considered a solicitation. The communication
generally is in the form of a voting recommendation based on the firm's
analysis of the proxy materials and whether a particular matter is
consistent with, not consistent with, or not covered by client voting
criteria; it is typically transmitted to the client shortly before the
meeting to aid the client's voting determination; and it may be a
factor in the client's voting determination. Also, as noted above,
proxy advisory firms market their services based on their expertise in
researching and analyzing proxy issues for purposes of helping their
clients make proxy voting determinations. As a result, even when based
on the client's own voting guidelines, we believe the communication, if
it reflects more than administrative or ministerial work, should be
viewed as part of a commercial service that is designed to influence
the client's voting decision. We believe this to be the case even in
circumstances where the client may not follow this advice.
For similar reasons, we disagree with the view that the proxy
voting advice provided by proxy advisory firms falls outside the
definition of a solicitation because it should not be viewed as
[[Page 47419]]
``unsolicited'' voting advice.\26\ We view these services provided by
proxy advisory firms as distinct from advice prompted by unsolicited
inquiries from clients to their financial advisors or brokers on how
they should vote their proxies, which remains outside the definition of
a solicitation.\27\ Rather than merely responding to client inquiries,
the communication is invited by the proxy advisory firms themselves
through the marketing of their expertise in researching and analyzing
proxy issues for purposes of helping clients make proxy voting
determinations.
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\26\ See ISS Letter (distinguishing between unsolicited and
solicited proxy advice and requesting that the Commission confirm
that while unsolicited proxy advice is a solicitation, a registered
investment adviser who is contractually obligated to furnish vote
recommendations based on client-selected guidelines does not provide
``unsolicited'' proxy voting advice, and therefore does not engage
in a solicitation).
\27\ See Broker-Dealer Release (setting forth the opinion of the
SEC's General Counsel that a broker is not engaging in a
``solicitation'' if it is merely responding to his customer's
request for advice and ``not actively initiating the
communication'').
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Notwithstanding the foregoing, we note that persons engaged in a
solicitation in the form of proxy voting advice, including proxy
advisory firms, may avail themselves of the exemptions from the
information and filing requirements of the federal proxy rules.\28\
Nothing in this interpretation is intended to restrict or limit
reliance on those exemptions.
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\28\ See, e.g., 17 CFR 240.14a-2(b)(1) and 17 CFR 240.14a-
2(b)(3).
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Question 2: Does Exchange Act Rule 14a-9 apply to proxy voting
advice?
Response: Yes. Solicitations that are exempt from the federal proxy
rules' information and filing requirements remain subject to Exchange
Act Rule 14a-9, which prohibits any solicitation from containing any
statement which, at the time and in the light of the circumstances
under which it is made, is false or misleading with respect to any
material fact.\29\ In addition, such solicitation must not omit to
state any material fact necessary in order to make the statements
therein not false or misleading.\30\ Rule 14a-9 also extends to
opinions, reasons, recommendations, or beliefs that are disclosed as
part of a solicitation, which may be statements of material facts for
purposes of the rule.\31\ Where such opinions, recommendations, or
similar views are provided, disclosure of the underlying facts,
assumptions, limitations, and other information may be needed so that
these views do not raise Rule 14a-9 concerns.\32\ Accordingly, any
person engaged in a solicitation through proxy voting advice must not
make materially false or misleading statements or omit material facts,
such as information underlying the basis of its advice or which would
affect its analysis and judgments, that would be required to make the
advice not misleading. For example, the provider of the proxy voting
advice should consider whether, depending on the particular statement,
it may need to disclose the following types of information in order to
avoid a potential violation of Rule 14a-9: \33\
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\29\ See 17 CFR 240.14a-9. See also, Concept Release, 75 FR
43010 (``Even if exempt from the informational and filing
requirements of the federal proxy rules, the furnishing of proxy
voting advice remains subject to the prohibition on false and
misleading statements in Rule 14a-9.'').
\30\ 17 CFR 240.14a-9.
\31\ See Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083,
1092 (1991) (stating that a board's recommendation that shareholders
approve a proposed merger because it viewed the proposal as ``fair''
to the minority shareholders and the offered merger consideration as
a ``high'' value were statements of material facts because ``[s]uch
statements are factual in two senses: As statements that the
directors do act for the reasons given or hold the belief stated and
as statements about the subject matter of the reason or belief
expressed'').
\32\ See, e.g., Dowling v. Narragansett Capital Corp., 735 F.
Supp. 1105, 1119 (D.R.I. 1990) (denying a motion to dismiss Rule
14a-9 complaints on the basis that ``allegations regarding
misrepresentations as to the value of . . . [a corporation's assets]
and nondisclosure of the limitations on the information underlying .
. . [a] fairness opinion implicate matters at the heart of the
decision confronting shareholders.''). The Commission staff has
previously raised questions about the appropriateness and adequacy
of disclosure under Rule 14a-9 in proxy solicitations. See, e.g.,
Interpretative Release Relating to Proxy Rules, Release No. 34-16833
(May 23, 1980) [45 FR 36374 (May 30, 1980)] (stating the Division of
Corporation Finance's view that in proxy contests in which the
disposition of a registrant's assets and distribution of the sale
proceeds to shareholders were the dissidents' goal, the inclusion of
valuations of the sale proceeds in the proxy soliciting material was
only appropriate under Rule 14a-9 when, among other things, they
were ``accompanied by disclosure which facilitate[d] shareholders'
understanding of the basis for and the limitations on the projected
realizable values.'').
\33\ We understand that some proxy advisory firms currently may
be providing some of the disclosures described in the examples
listed in this section.
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An explanation of the methodology used to formulate its
voting advice on a particular matter (including any material deviations
from the provider's publicly-announced guidelines, policies, or
standard methodologies for analyzing such matters) where the omission
of such information would render the voting advice materially false or
misleading; \34\
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\34\ To the extent that the proxy voting advice is materially
based on a methodology using a group of peer companies selected by
the proxy advisory firm, the disclosure may need to include the
identities of the peer group members used as part of its
recommendation and the reasons for selecting these peer group
members as well as, if material, why its peer group members differ
from those selected by the registrant. For example, such disclosure
may be needed for a voting recommendation on a registrant's advisory
vote on an executive compensation proposal that is based on a
comparison of the registrant's executive compensation policies to
those of other companies selected by the proxy advisory firm.
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to the extent that the proxy voting advice is based on
information other than the registrant's public disclosures, such as
third-party information sources,\35\ disclosure about these information
sources and the extent to which the information from these sources
differs from the public disclosures provided by the registrant if such
differences are material and the failure to disclose the differences
would render the voting advice false or misleading; and
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\35\ Such sources could include third-party research or
publications, commercial or financial information databases, or
ratings or rankings published by third parties.
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disclosure about material conflicts of interest that arise
in connection with providing the proxy voting advice in reasonably
sufficient detail so that the client can assess the relevance of those
conflicts.\36\
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\36\ Relationships or interests that may create conflicts of
interest are commonly found by courts as material information that
should be disclosed to avoid Rule 14a-9 violations. See, e.g.,
Maldonado v. Flynn, 597 F.2d 789 (2d Cir. 1979) (noting that
``shareholders are entitled to truthful presentation of factual
information'' when there is a possibility of self-dealing among
directors and emphasizing the importance of Rule 14a-9 in eliciting
disclosures of this material information).
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III. Other Matters
Pursuant to the Congressional Review Act,\37\ the Office of
Information and Regulatory Affairs has designated this guidance and
interpretation as not a ``major rule,'' as defined by 5 U.S.C. 804(2).
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\37\ 5 U.S.C. 801 et seq.
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List of Subjects in 17 CFR Part 241
Securities.
Amendments to the Code of Federal Regulations
For the reasons set out above, the Commission is amending title 17,
chapter II of the Code of Federal Regulations as set forth below:
PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
1. An authority citation is added for part 241 to read as follows:
Authority: 15 U.S.C. 78a et seq.
0
2. The table is amended by adding an entry for Release No. 34-86721 at
the end to read as follows:
[[Page 47420]]
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Subject Release No. Date Fed. Reg. vol. and page
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* * * * * * *
Commission Interpretation and Guidance 34-86721 August 21, 2019........... [Insert FR Volume Number]
Regarding the Applicability of the FR [Insert FR Page
Proxy Rules to Proxy Voting Advice. Number].
----------------------------------------------------------------------------------------------------------------
By the Commission.
Dated: August 21, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-18355 Filed 9-9-19; 8:45 am]
BILLING CODE 8011-01-P
