Proposed changes to investment adviser advertising rules will likely be welcomed relief to industry

SEC Proposes Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice

Here is the SEC’s Fact Sheet on its proposed amendments to its rules governing proxy solicitations.

FACT SHEET

Proposed Rule Amendments for Proxy Voting Advice

SEC Open Meeting
Nov. 5, 2019

The Securities and Exchange Commission today proposed amendments to its rules that exempt businesses furnishing proxy voting advice from the filing and information requirements of the federal proxy rules. The Commission’s proposal is intended to help ensure that proxy voting advice used by investors and others who vote on investors’ behalf is accurate, transparent, and materially complete. If adopted, the proposal would amend Exchange Act Rule 14a-2(b), which provides exemptions from the proxy rules’ filing and information requirements for certain kinds of solicitations, call for enhanced disclosure of material conflicts of interest, a standardized opportunity for registrants and other soliciting persons to review proxy voting advice, and an improved means for investors to be informed about differing views on the advice. In addition, the proposed changes would codify recent Commission guidance by amending the definition of “solicitation” in Exchange Act Rule 14a-1(l) to include proxy voting advice, with certain exceptions, and provide additional illustrative examples to Exchange Act Rule 14a-9, the proxy rules’ antifraud provision.

Background

The Commission’s proposal is part of its ongoing focus on improving the proxy process and the ability of shareholders to exercise their voting rights.  It follows the Commission’s recent guidance clarifying the applicability of the federal proxy rules to proxy voting advice and the proxy voting responsibilities of investment advisers, roundtables on the proxy process in 2018 and proxy advisory services in 2013, and the publication of its Concept Release on the U.S. proxy system in 2010.

Highlights

Rule 14a-1(l). The proposed amendments would amend Exchange Act Rule 14a-1(l), which defines the terms “solicit” and “solicitation,” to specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules. The proposed amendment would also codify the Commission’s view that voting advice provided in response to an unprompted request would not constitute a solicitation.

Rules 14a-2(b)(1) and 14a-2(b)(3). The proposed amendments would revise Rule 14a-2(b), which provides exemptions from the information and filing requirements of the proxy rules.  Under the proposed amendments, proxy voting advice businesses relying on these exemptions would be subject to the following conditions:

  • They must include disclosure of material conflicts of interest in their proxy voting advice;
  • Registrants and certain other soliciting persons must be given an opportunity to review and provide feedback on proxy voting advice before it is issued (with the length of the review period dependent on the number of days between the filing of the definitive proxy statement and the date of the shareholder meeting); and
  • Registrants and certain other soliciting persons may request that proxy voting advice businesses include in their voting advice a hyperlink or analogous electronic medium directing the recipient of the advice to a written statement that sets forth the registrant’s or soliciting person’s views on the proxy voting advice.

The proposed amendments would permit proxy voting advice businesses to require registrants and other soliciting persons to enter into confidentiality agreements for materials exchanged during the review and feedback period and would allow proxy voting advice businesses to rely on the exemptions where failure to comply with the new conditions was immaterial or unintentional.

Rule 14a-9. The proposed amendments would modify Rule 14a-9 to include examples of when the failure to disclose certain information in the proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule.

What’s Next?

The proposal will be subject to a 60-day public comment period. To submit comments, use the SEC’s Internet submission form or send an email to rule-comments@sec.gov.

SEC Proposes Amendments to Modernize Shareholder Proposal Rule

Here is the SEC Fact Sheet on today’s shareholder proposal rule amendments:

FACT SHEET

Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8

SEC Open Meeting
Nov. 5, 2019

The Securities and Exchange Commission today proposed amendments to Exchange Act Rule 14a-8, the shareholder-proposal rule, which requires companies subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The rule permits a company to exclude a shareholder proposal from its proxy statement if the proposal fails to meet any of several specified substantive or procedural requirements, or if the shareholder-proponent does not satisfy certain eligibility or procedural requirements. The proposed amendments would:

  • update the criteria, including the ownership requirements, that a shareholder must satisfy to be eligible to have a shareholder proposal included in a company’s proxy statement
  • update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder; and
  • modernize the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings.

Background

The Commission’s proposal is part of its ongoing focus on improving the proxy process and the ability of shareholders to exercise their voting rights. SEC staff have been deeply involved in the proxy process for decades and review hundreds of unique shareholder proposals and other proxy materials each year. Over the years, the Commission has become aware of the need to update certain of the rule’s procedural and substantive requirements, which have not been reviewed by the Commission in more than 20 years. After considering the views expressed by members of the public, including feedback received as part of the Commission’s 2018 Roundtable on the Proxy Process, the Commission proposed amendments to modernize the criteria for use of the shareholder-proposal process through the company’s proxy statement.

Highlights

The proposed amendments would revise the eligibility requirements under Rule 14a-8(b), the one-proposal limit under Rule 14a-8(c), and the resubmission thresholds under Rule 14a-8(i)(12).

In particular, the proposed amendments to Rule 14a-8(b) would:

  • update the current requirement that a shareholder-proponent hold at least $2,000 or 1 percent of a company’s securities for at least one year to be eligible to submit a proposal. In addition to eliminating the 1 percent threshold, the proposal would amend the rule with the following three alternative thresholds, any one of which a shareholder could satisfy to be eligible to submit a proposal:
    • continuous ownership of at least $2,000 of the company’s securities for at least three years;
    • continuous ownership of at least $15,000 of the company’s securities for at least two years; or
    • continuous ownership of at least $25,000 of the company’s securities for at least one year.
  • require that a shareholder-proponent who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the shareholder-proponent’s behalf and to provide a meaningful degree of assurance as to the shareholder-proponent’s identity, role and interest in a proposal that is submitted for inclusion in a company’s proxy statement; and
  • require that each shareholder-proponent state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, nor more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as business days and specific times that the shareholder-proponent is available to discuss the proposal with the company.

The proposed amendment to Rule 14a-8(c) would:

  • apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a shareholder-proponent would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting. Likewise, a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.

The proposed amendments to Rule 14a-8(i)(12) would:

  • modernize the current resubmission thresholds of 3 percent, 6 percent and 10 percent for matters voted on once, twice or three or more times in the last five years, respectively, with thresholds of 5 percent, 15 percent and 25 percent, respectively;[1] and
  • add a new provision that would allow for exclusion of a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25 percent of the votes cast on its most recent submission, if the proposal (i) received less than 50 percent of the votes cast and (ii) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.

What’s Next?

The proposal will be subject to a 60-day public comment period.  To submit comments, use the SEC’s Internet submission form or send an email to rule-comments@sec.gov.

ISS challenges SEC over recent proxy adviser guidance

SEC schedules Nov 5 open meeting on shareholder engagement

The SEC has announced an upcoming Open Meeting, the subject matter of which will be the SEC’s continued efforts to facilitate constructive shareholder engagement and enhance transparency, improve disclosures, and increase confidence in the proxy process. The specific matters to be considered are:

  1. Whether to propose amendments to the proxy solicitation rules that would provide for disclosure of material conflicts of interest and set forth procedures to facilitate issuer and shareholder engagement, to provide clarity to market participants, and to improve the information provided to investors.
  2. Whether to propose amendments to the shareholder proposal rules to modernize the submission and resubmission requirements and to update procedural requirements.

In addition, the subject matter of the Open Meeting will also include the SEC’s continued efforts to modernize the regulatory framework for investment advisers and enhance information to investors. The specific matter to be considered is:

  1. Whether to propose amendments under the Investment Advisers Act of 1940 to rules 206(4)-1 and 206(4)-3, the rules that prohibit certain investment adviser advertisements and payments to solicitors, respectively.

The Open Meeting is scheduled for November 5 at 10 am.

A trap door of the 25% plan assets test

Many sponsors of private funds, particularly hedge funds, rely on the 25% or significant participant test in order to avoid holding plan assets under ERISA. Equity participation in an entity by benefit plan investors is “significant” on any date if, immediately after the most recent acquisition of any equity interest in the entity, 25 percent or more of the value of any class of equity interests in the entity is held by benefit plan investors. Investments by the fund’s investment manager and its affiliates are disregarded. There is little guidance in terms of what constitutes separate equity classes. Some ERISA attorneys will look to see how “class” is defined under the securities laws, such as the Exchange Ac or the ’40 Act. Yet others consider other factors, as well. Is it described in the offering materials as a class? Would the different features (e.g., different fees, liquidity terms, etc.) render it a different class under local law?