United States: House Budget Package Would Scrap Proxy Advisor Rules

It's worth noting that the budget package passed by the House last week includes a provision intended to put the kibosh on the proxy advisory firm rules that were adopted by the SEC in July 2020. Specifically, the bill provides that "[n]one of the funds made available by this Act may be used to implement the amendments to sections 240.14a-1(l), 240.14a–2, or 240.14a-9 of title 17, Code of Federal Regulations, that were adopted by the Securities and Exchange Commission on July 22, 2020." Of course, Corp Fin had already put a temporary halt on enforcement of those rules.   And unlike prior years, there is no provision in the House bill—yet—that would prohibit the SEC from using any of the funds to finalize rules requiring disclosure of corporate political spending. The bill next goes to the Senate, where, of course, there could be substantial changes.

Proxy advisors. As you may recall, In July 2020, the SEC adopted, by a vote of three to one, new amendments to the proxy rules regarding proxy advisory firms, such as ISS and Glass Lewis.  The amendments made proxy voting advice subject to the proxy solicitation rules and conditioned exemptions from those rules for proxy advisory firms on disclosure of conflicts of interest and adoption of principles-based policies to make proxy voting advice available to the subject companies and to notify clients of company responses. In addition, the amendments provided two non-exclusive safe harbors designed to satisfy the conditions to the exemptions. The amendments also modified Rule 14a-9 to include examples of material omissions in proxy voting advice that could be considered misleading within the meaning of the rule.  (For a more complete description of the amendments, see this PubCo post.) Then-SEC Chair Jay Clayton observed that the final rules were the product of a 10-year effort—commencing with the SEC's  2010 Concept Release on the U.S. Proxy System—which led to "robust discussion" from all market participants.  The original proposal generated substantial comment and criticism, and the SEC indicated that it took much of it into account in developing the final rule.

Commissioner Elad Roisman, who honchoed the proxy-process rulemakings through the SEC, said that there were growing calls for the SEC to provide more oversight of proxy advisors as institutional ownership of the public markets has "increased to unprecedented levels and rendered the voting advice sold by proxy voting advice businesses more widely consumed—and influential—than ever before....Advocates for reform have argued that new regulations are needed to address conflicts of interests, factual errors, and methodological biases in these businesses' proxy voting advice. They have also called for the Commission to reaffirm the principle that asset managers may not rely on this advice wholesale and to address the practice of so-called 'robo-voting.' Of course, others have opposed any SEC action in this area, advocating instead that the SEC dismiss these persistent calls for reform and simply do nothing." In particular, he noted that it is universally acknowledged that proxy advisors "play a significant role in the proxy voting system," and that their clients "believe their advice is material and market-moving."

Commissioner Allison Herren Lee, who dissented on the rule adoption, objected to the rule changes as "unwarranted, unwanted, and unworkable." According to Lee, the new rules would "increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn't broken, as we still have not produced any objective evidence of a problem with proxy advisory firms' voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing."

No surprise, the proxy advisors—and a number of institutional investors—were not happy about the new rules. (See this PubCo post.) In June 2021, SEC Chair Gary Gensler  directed the staff to consider whether further regulatory action regarding proxy voting advice would be appropriate.  In particular, Gensler asked the staff to consider "whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters." As a result, Corp Fin issued a Statement indicating that "it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area." (See this PubCo post.) Accordingly, proposed amendments governing proxy voting advice are now on the short-term agenda with a target date of 4/22 for issuance of a proposal. 

Political spending. Although rules requiring disclosure of corporate political spending are not on the SEC's short-term agenda, the possibility of rulemaking on this subject has certainly been on the radar.  For example, at Gensler's confirmation hearing, Senator Pat Toomey asked Gensler whether, if a large public company reported revenues of hundreds of billions of dollars, and it spent a million dollars on political issue ads, should disclosure be required? Gensler responded that the question is what information reasonable investors are seeking to make voting or investment decisions, and last year, based on their proxy votes on shareholder proposals, about 40% of shareholders said that political spending information would be material.  Senator Robert Menendez dug further into the question, noting that over 1.2 million individuals had previously pressed the SEC to adopt a political spending disclosure mandate. Now, in the absence of disclosure standards, executives can spend corporate funds to serve their own political interests without any transparency. In addition, in light of the events of January 6, many companies had recently reevaluated their prior decisions on political donations, in part out of concern for the potential impact of donations on their corporate reputations.  How did Gensler view political spending disclosure? Gensler agreed, without addressing the particular issue, that disclosure was important, that he would be guided by the materiality standards he had described earlier. He added that he considered the 80 shareholder proposals submitted last year on the topic and the 40% vote in favor as a strong indicator.  In light of that level of investor interest, political spending disclosure was something he thought the SEC should consider. (See this PubCo  post.)

In May, in keynote remarks to the 2021 ESG Disclosure Priorities Event, Commissioner Lee also discussed political spending as an issue that can be extremely important to reasonable investors, particularly because shareholders want to be able to assess the use by companies of shareholder funds for political influence. But, despite rulemaking petitions and other efforts, there are no SEC requirements to disclose political spending and, as a result, it's rarely disclosed in SEC reports. As she noted, the SEC was then prohibited by Congress from spending funds to finalize a rule on this subject. (See this PubCo post.) Lee has previously stressed the importance of political spending disclosure in connection with ESG, noting in particular that investors need to be able to ascertain inconsistencies between a company's public statements and its corporate political donations. Political spending disclosure, she said, "is inextricably linked to ESG issues." She cited research showing that many companies that made carbon-neutral pledges or statements in support of climate initiatives have donated to candidates with "climate voting records inconsistent with such assertions."  In this context, disclosure is key to accountability.  (See this PubCo post.)

With regard to political spending legislation, in March, Senators Chris Van Hollen and Robert Menendez reintroduced the Shareholder Protection Act of 2021 to mandate not only political spending disclosure, but also shareholder votes to authorize corporate political spending. According to the press release, "more than 1.2 million securities experts, institutional and individual investors, and members of the public have pressed the [SEC] for a political spending disclosure rule [in a 2011 rulemaking petition]. Yet, no political spending disclosure standards have actually been established, which has allowed corporate executives to continue spending shareholder money without disclosure to and approval from the very investors funding those contributions." 

Among other things, the bill would amend the Exchange Act to add, in new Section 14C, a requirement that proxy statements contain a description of any expenditure for political activities (as defined) proposed to be made in the coming fiscal year that had not been authorized by a vote of the shareholders, including the proposed total amount, and provide for a separate vote of the shareholders to authorize these expenditures. Companies would be prohibited from making any political expenditures that had not been authorized by a vote of the holders of the majority of the outstanding shares. (See this PubCo post.)